before the appellate tribunal for electricity (appellate...

Appeal Nos. 4,13,14,23,25,26,35,36,54 and 55

Before the Appellate Tribunal for Electricity (Appellate Jurisdiction)

APPEAL NOs. 4, 13, 14, 23, 25, 26, 35, 36, 54 & 55 of 2005

Dated: 26th May, 2006 Present: Hon’ble Mr. Justice Anil Dev Singh, Chairperson Hon’ble Mr. Justice E. Padmanabhan, Judicial Member Hon’ble Mr. A.A. Khan, Technical Member

APPEAL No.4 of 2005

M/s Siel Limited 19, Rajendra Place New Delhi 110008 …Appellant Vs. 1. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Chairman 2. Punjab State Electricity Board, The Mall, Patiala, through its Chairman 3. State of Punjab through the Secretary, Department of Power, Chandigarh

...Respondents Counsel for Appellant (s): Mr. Sanjay Sen Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna

Baghel, Ms. Saumya Sharma for PSERC

Mr. P.S. Bhullar, for PSEB Mr. D.P. Singh, Addl. Advocate

General with Sh. Avneet Toor for State of Punjab Mr. J.C. Shukla, Registrar for PSERC

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APPEAL No.13 of 2005

PHD Chamber of Commerce & Industry …Appellant 107, Sector 18-A, Chandigarh Through its Co-Chairman Vs. 1. State of Punjab through Secretary-Power Punjab Civil Secretariat, Chandigarh 2. Punjab State Electricity Board, The Mall, Patiala, through its Secretary 3. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Registrar ...Respondents

Counsel for Appellant (s): Mr. Amit Rawal & Mr. Praveen Gupta Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna



General with Sh. Avneet Toor for State of Punjab


APEX Chamber of Commerce & Industry (Punjab), Room No.212, 2nd Floor, Savitri Complex, …Appellant G.T. Road, Ludhiana. Vs. 1. State of Punjab through Secretary-Power Punjab Civil Secretariat, Chandigarh 2. Punjab State Electricity Board, The Mall, Patiala, through its Secretary 3. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Registrar ...Respondents

Counsel for Appellant (s): Mr. Amit Rawal & Mr. Praveen Gupta Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna

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Baghel, Ms. Saumya Sharma for PSERC Mr. P.S. Bhullar, for PSEB

Mr. D.P. Singh, Addl. Advocate General with Sh. Avneet Toor for State of Punjab

APPEAL No.23 of 2005 Steel Furnace Association of India …Appellant (Punjab Chapter), C/o. Upper India Steel Mfg., & Engg. Co. Ltd, Ludhiana – 141 010 & Ors., Vs. 1. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Chairman 2. Punjab State Electricity Board, The Mall, Patiala, through its Chairman 3. State of Punjab through the Secretary, Department of Power, Chandigarh

...Respondents Counsel for Appellant (s): Mr. S.N. Mookherjee, Sr. Adv with Mr. Ravi Kapur Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna




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APPEAL No.25 of 2005 All India Steel Re-Rollers Association …Appellant Ram Mandir, G.T. Road, Gobindgarh, Fatehgarh Sahib thorugh its authorized Signatory Sh.K.K.Bhatia Vs. 1. Punjab State Electricity Board, The Mall, Patiala, through its Secretary

2. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Registrar ...Respondents

Counsel for Appellant (s): Mr. Vishal Gupta Mr. Sunil Narang

Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna Baghel, Ms. Saumya Sharma for PSERC




Mandi Gobindgarh Induction Furnace Association C/o.Gian Casting Pvt Ltd., Grain Market, Mandi Gobindgarh Though its authorized signatory …Appellant Vs. 1. Punjab State Electricity Board, The Mall, Patiala, through its Secretary

2. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Registrar ...Respondents

Counsel for Appellant (s): Mr. Rajesh Bindal

Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna Baghel, Ms. Saumya Sharma for PSERC



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M/s Punjab Alkalies & Chemicals Limited …Appellant S.C.O. 125-127, Sector 17-B, Chandigarh -160017 Vs. 1. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Secretary 2. Punjab State Electricity Board, The Mall, Patiala, through its Secretary 3. Government of Punjab through the Secretary, Department of Power, Chandigarh

...Respondents Counsel for Appellant (s): Mr. Arun Nehra for PACL Mr. Anurag Puri & Mr. M.P.S. Rana Counsel for Respondent (s) Mr. M.G. Ramachandran, Ms. Taruna

Baghel, Ms. Saumya Sharma for PSERC Mr. P.S. Bhullar, for PSEB



Lalru Industries Association (Regd.) Secretariate, Wockhardt Limited Village Sarsini, Patiala thourgh its President …Appellant Vs. 1. Punjab State Electricity Board, The Mall, Patiala, through its Chairman

2. The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh Through its Chairman ...Respondents

Counsel for Respondent (s) Mr. M.G. Ramachandran, Ms. Taruna

Baghel, Ms. Saumya Sharma for PSERC Mr. P.S. Bhullar, for PSEB Mr. Chandan Kumar

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APPEAL No.54 of 2005 Punjab State Electricity Board The Mall, Patiala, Punjab Though authorized Officer …Appellant Vs.

1 . The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh

2. State of Punjab, Department of Power, Punjab Government Secretariat, Chandigarh Through its Principal Secretary & Ors.,

...Respondents Counsel for Appellant (s): Mr. P.S. Bhullar Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna

Baghel, Ms. Saumya Sharma for PSERC Mr. Arun Nehra for PACL Mr. Sharat Kapoor for BSNL Mr. Vishal Gupta Mr. Narender Singh Yadav Mr. Rajesh Bindal Mr. Chandan Kumar for Northern Rly. Mr. Amit Rawal


APPEAL No.55 of 2005 Punjab State Electricity Board The Mall, Patiala, Punjab Though authorized Officer …Appellant Vs.

1 . The Punjab State Electricity Regulatory Commission, SCO Nos.220-221, Sector 34-A, Chandigarh

2. State of Punjab, Department of Power, Punjab Government Secretariat, Chandigarh Through its Principal Secretary & Ors.,

...Respondents

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Counsel for Appellant (s): Mr. P.S. Bhullar Counsel for Respondent (s): Mr. M.G. Ramachandran, Ms. Taruna Baghel, Ms. Saumya Sharma for PSERC Mr. D.P. Singh, Addl. Advocate

General with Sh. Avneet Toor for State of Punjab Mr. Chandan Kumar Mr. Vishal Gupta Mr. Ajay Majithia Mr. Manish Jain Mr. Rajesh Bindal Mr. Amar Singh

JUDGMENT

PER HON’BLE MR. JUSTICE ANIL DEV SINGH, CHAIRPERSON

This order will dispose of three sets of appeals. Appeal

Nos. 4, 13, 14, 23, 25, 26 & 35 of 2005 have been filed either

by the Power Intensive Industrial Consumers or their

associations and are directed against the Order of the Punjab

State Electricity Regulatory Commission

(PSERC/Commission), dated June 14, 2005, to the extent it

fixes tariff for power intensive industrial consumers at the rate

of Rs.3.72 per KWH.

2. Appeal No.36 of 2005, filed by an association of Power

Intensive Industrial Consumers, challenges Circular No.42 of

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2005 of the Punjab State Electricity Board (PSEB/Board)

issued in compliance with the order of the PSERC, dated June

14, 2005, whereby tariff to various categories of consumers

were revised.

3. The other two appeals being Appeal Nos.54 and 55 of

2005, have been filed by the PSEB. While Appeal No.54 of

2005 is directed against the tariff order of the PSERC, for the

year 2004-2005, dated November 30, 2004, the other Appeal,

being Appeal No.55 of 2005, is directed against the tariff order

of the PSERC for the year 2005-2006, dated June 14, 2005.

In both the appeals, the PSEB questions the decisions of the

PSERC, whereby certain expenses allegedly incurred by the

Board have been disallowed.

4. The facts leading to these appeals briefly stated are as

under:

On March 31, 1999, the PSERC was created under

Section 17 of the Electricity Regulatory Commissions Act,

1998 (for short Act of 1998). On June 10, 2003, the Electricity

Act, 2003 (for short Act of 2003), came into force. By virtue of

the first proviso to Section 82 of the Act of 2003, the PSERC

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constituted under the Act of 1998 is deemed to have been

constituted under the Act of 2003. On December 8, 2003, the

PSEB filed its ARR and proposed tariff for the financial year

2004-05 before the PSERC. On February 23, 2004, the

PSERC required the PSEB to withdraw the ARR, until

modalities of its financial reconstruction package were worked

out and were included in the ARR. Thereafter, on April 6,

2004, the PSERC allowed the PSEB to withdraw ARR with

permission to file a tariff proposal by May 31, 2004. On May

31, 2004, the PSEB again filed its ARR and tariff proposals for

the year 2004-05. The PSERC after issuing a public notice

and taking into consideration the objections and suggestions

filed in response thereto disallowed certain expenses of the

PSEB and determined the tariff and ARR for the year 2004-

2005 on November 30, 2004. On December 30, 2004, the

PSEB filed its ARR for the financial year 2005-06, along with

an application for determination of tariff for the said year. The

application was found to be incomplete by the PSERC. The

deficiencies in the filings were communicated to the Board by

the Commission vide its letter, dated January 21, 2005. After

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the PSEB removed the deficiencies, the ARR and tariff review

application were taken on record by the PSERC on February 9,

2005. The filings by the PSEB were notified for information of

the consumers through news papers on February 14, 2005 for

their response. After the receipt of the objections and

suggestions and on hearing the interested parties, the PSERC

determined the tariff for the financial year 2005-06 by its

Order, dated June 14, 2005.

5 As already pointed out, the PSEB being aggrieved by the

tariff Orders, dated November 30, 2004, and June 14, 2005,

has preferred Appeals, being Appeal Nos. 54 and 55 of 2005.

Seven appeals being Appeal Nos. 4, 13, 14, 23, 25, 26, 35 and

36 of 2005 have been filed by the Power Intensive Industrial

Consumers and their associations.

6. Extensive arguments were advanced by the learned

counsel for the parties including the State of Punjab spread

over a number of days. Some of the parties have filed

elaborate written submissions. We now proceed to consider

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the various points which were raised before us in these

appeals.

A. Tariff Determination without Framing of Regulations-Whether bad in law or stands vitiated

7. The sheet anchor of the case of the learned counsel for

the Power Intensive Industrial Consumers (Industrial

Consumers) is that the tariff for the financial year, 2005-06

has been determined by the PSERC without framing Tariff

Regulations under Section 61 of the Act of 2003 and is,

therefore, bad in law. According to them framing of the tariff

Regulations is a condition precedent for exercise of power by

the Commission under Section 62 of the Act of 2003 for

determination of tariff. It was submitted that since

Regulations were not framed under Section 61 of the Act of

2003, the Commission had no power to determine the tariff

under Section 62 thereof. On the other hand, the learned

counsel appearing for the Commission and the Board

submitted that the power of the Commission to fix tariff was

not dependent upon the framing of the Regulations under

Section 61 of the Act.

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8. In order to appreciate the submissions of the learned

counsel for the parties, it will be useful to set out the

provisions of Sections 2(62), 61, 62, 64, 76, 79, 82, 86, 178 &

181 of the Act of 2003 to the extent they are relevant to the

issue. These provision read thus:

“2(62)"specified" means specified by Regulations made by the Appropriate Commission or the Authority, as the case may be, under this Act;

61. Tariff Regulations - The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely:-

(a) the principles and methodologies specified by the Central Commission for determination of the tariff applicable to generating companies and transmission licensees;

(b) the generation, transmission, distribution and supply of electricity are conducted on commercial principles;

(c) the factors which would encourage competition, efficiency, economical use of the resources, good performance and optimum investments;

(d) safeguarding of consumers' interest and at the same time, recovery of the cost of electricity in a reasonable manner;

(e) the principles rewarding efficiency in performance;

(f) multi year tariff principles;

(g) that the tariff progressively, reflects the cost of supply of electricity, and also, reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission;

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(h) the promotion of co-generation and generation of electricity from renewable sources of energy;

(i) the National Electricity Policy and tariff policy:

Provided that the terms and conditions for determination of

tariff under the Electricity (Supply) Act, 1948 (54 of 1948), the Electricity Regulatory Commissions Act, 1998 (14 of 1998) and the enactments specified in the Schedule as they stood immediately before the appointed date, shall continue to apply for a period of one year or until the terms and conditions for tariff are specified under this section, whichever is earlier.

62. Determination of tariff- (1)The Appropriate Commission shall determine the tariff in accordance with provisions of this Act for –

(a) supply of electricity by a generating company to a distribution licensee:

Provided that the Appropriate Commission may, in case of shortage of supply of electricity, fix the minimum and maximum ceiling of tariff for sale or purchase of electricity in pursuance of an agreement, entered into between a generating company and a licensee or between licensees, for a period not exceeding one year to ensure reasonable prices of electricity;

(b) transmission of electricity ;

(c) wheeling of electricity;

(d) retail sale of electricity.

Provided that in case of distribution of electricity in the same area by two or more distribution licensees, the Appropriate Commission may, for promoting competition among distribution licensees, fix only maximum ceiling of tariff for retail sale of electricity.

(2) The Appropriate Commission may require a licensee or a generating company to furnish separate details, as may be

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specified in respect of generation, transmission and distribution for determination of tariff.

(3) The Appropriate Commission shall not, while determining the tariff under this Act, show undue preference to any consumer of electricity but may differentiate according to the consumer's load factor, power factor, voltage, total consumption of electricity during any specified period or the time at which the supply is required or the geographical position of any area, the nature of supply and the purpose for which the supply is required.

(4) No tariff or part of any tariff may ordinarily be amended, more frequently than once in any financial year, except in respect of any changes expressly permitted under the terms of any fuel surcharge formula as may be specified.

(5) The Commission may require a licensee or a generating company to comply with such procedures as may be specified for calculating the expected revenues from the tariff and charges which he or it is permitted to recover.

(6) If any licensee or a generating company recovers a price or charge exceeding the tariff determined under this section, the excess amount shall be recoverable by the person who has paid such price or charge along with interest equivalent to the bank rate without prejudice to any other liability incurred by the licensee.

64. Procedure for tariff order. (1) An application for determination of tariff under section 62 shall be made by a generating company or licensee in such manner and accompanied by such fee, as may be determined by Regulations. (2) Every applicant shall publish the application, in such abridged form and manner, as may be specified by the Appropriate Commission.

(3) The Appropriate Commission shall, within one hundred and twenty days from receipt of an application under sub-

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section (1) and after considering all suggestions and objections received from the public,-

(a) issue a tariff order accepting the application with such modifications or such conditions as may be specified in that order;

(b) reject the application for reasons to be recorded in writing if such application is not in accordance with the provisions of this Act and the rules and Regulations made thereunder or the provisions of any other law for the time being in force:

Provided that an applicant shall be given a reasonable opportunity of being heard before rejecting his application.

(4) The Appropriate Commission shall, within seven days of making the order, send a copy of the order to the Appropriate Government, the Authority, and the concerned licensees and to the person concerned.

(5) Notwithstanding anything contained in Part X, the tariff for any inter-State supply, transmission or wheeling of electricity, as the case may be, involving the territories of two States may, upon application made to it by the parties intending to undertake such supply, transmission or wheeling, be determined under this section by the State Commission having jurisdiction in respect of the licensee who intends to distribute electricity and make payment therefor:

(6) A tariff order shall, unless amended or revoked, continue to be in force for such period as may be specified in the tariff order.

76. Constitution of Central Commission – (1) There shall be a Commission to be known as the Central Electricity Regulatory Commission to exercise the powers conferred on, and discharge the functions assigned to, it under this Act.

(2) the Central Electricity Regulatory Commission, established under Section 3 of the Electricity Regulatory

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Commissions Act, 1998 (14 of 1998) and functioning as such immediately before the appointed date, shall be deemed to be the Central Commission for the purposes of this Act and the Chairperson, Members, Secretary, and other officers and employees thereof shall deemed to have been appointed under this Act and they shall continue to hold office on the same terms and conditions on which they were appointed under the Electricity Regulatory Commissions Act, 1998 (14 of 1998).

Provided that the Chairperson and other Members of the Central Commission appointed, before the commencement of this Act, under the Electricity Regulatory Commissions Act, 1998 (14 of 1998), may, on the recommendations of the Selection Committee constituted under sub-section (1) of section 78, be allowed to opt for the terms and conditions under this Act by the Central Government.

(3) The Central Commission shall be a body corporate by the name aforesaid, having perpetual succession and a common seal with power to acquire, hold and dispose of property, both movable and immovable, and to contract and shall, by the said name, sue or be sued.

(4) The head office of the Central Commission shall be at such place as the Central Government may, by notification, specify.

(5) The Central Commission shall consist of the following Members, namely:-

(a) a Chairperson and three other Members;

(b) the Chairperson of the Authority who shall be the Member, ex officio.

(6) The Chairperson and Members of the Central Commission shall be appointed by the Central Government on the recommendation of a Selection Committee referred to in section 78.

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79. Functions of Central Commission – (1) The Central Commission shall discharge the following functions, namely:-

(a) to regulate the tariff of generating companies owned or controlled by the Central Government;

(b) to regulate the tariff of generating companies other than those owned or controlled by the Central Government specified in clause (a), if such generating companies enter into or otherwise have a composite scheme for generation and sale of electricity in more than one State;

(c) to regulate the inter-State transmission of electricity

(d) to determine tariff for inter-State transmission of electricity;

(e) to issue licenses to persons to function as transmission licensee and electricity trader with respect to their inter-State operations.

(f) to adjudicate upon disputes involving generating companies or transmission licensee in regard to matters connected with clauses (a) to (d) above and to refer any dispute for arbitration;

(g) to levy fees for the purposes of this Act;

(h) to specify Grid Code having regard to Grid Standards;

(i) to specify and enforce the standards with respect to quality, continuity and reliability of service by licensees.

(j) to fix the trading margin in the inter-State trading of electricity, if considered, necessary;

(k) to discharge such other functions as may be assigned under this Act.

(2) The Central Commission shall advise the Central Government on all or any of the following matters, namely:-

(i) formulation of National electricity Policy and tariff policy;

(ii) promotion of competition, efficiency and economy in activities of the electricity industry;

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(iii) promotion of investment in electricity industry;

(iv) any other matter referred to the Central Commission by that Government.

(3) The Central Commission shall ensure transparency while exercising its powers and discharging its functions.

(4) In discharge of its functions, the Central Commission shall be guided by the National Electricity Policy, National Electricity Plan and Tariff Policy published under section 3.

82. Constitution of State Commission- (1) Every State Government shall, within six months from the appointed date, by notification, constitute for the purposes of this Act, a Commission for the State to be known as the (name of the State) Electricity Regulatory Commission:

Provided that the State Electricity Regulatory Commission, established by a State Government under section 17 of the Electricity Regulatory Commissions Act, 1998 (14 of 1998) and the enactments specified in the Schedule, and functioning as such immediately before the appointed date shall be the State Commission for the purposes of this Act and the Chairperson, Members, Secretary, and officers and other employees thereof shall continue to hold office, on the same terms and conditions on which they were appointed under those Acts:

Provided further that the Chairperson and other Members of the State Commission, appointed, before the commencement of this Act, under the Electricity Regulatory Commissions Act, 1998 (14 of 1998) or under the enactments specified in the Schedule, may, on the recommendations of the Selection Committee constituted under sub-section (1) of Section 85, be allowed to opt for the terms and conditions under this Act by the concerned State Government.

(2) The State Commission shall be a body corporate by the name aforesaid, having perpetual succession and a common seal, with power to acquire, hold and dispose of

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property, both movable and immovable, and to contract and shall, by the said name, sue or be sued.

(3) The head office of the State Commission shall be at such place as the State Government may, by notification, specify.

(4) The State Commission shall consist of not more than three Members, including the Chairperson.

(5) The Chairperson and Members of the State Commission shall be appointed by the State Government on the recommendation of a Selection Committee referred to in section 85.

Section-86. Functions of State Commission-(1) The State Commission shall discharge the following functions, namely:

(a) determine the tariff for generation, supply, transmission and wheeling of electricity, wholesale, bulk or retail, as the case may be, within the State:

Provided that where open access has been permitted to a category of consumers under section 42, the State Commission shall determine only the wheeling charges and surcharge thereon, if any, for the said category of consumers;

(b) regulate electricity purchase and procurement process of distribution licensees including the price at which electricity shall be procured from the generating companies or licensees or from other sources through agreements for purchase of power for distribution and supply within the State;

(c) facilitate intra-State transmission and wheeling of electricity;

(d) issue licenses to persons seeking to act as transmission licensees, distribution licensees and electricity traders with respect to their operations within the State;

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(e) promote cogeneration and generation of electricity from renewable sources of energy by providing suitable measures for connectivity with the grid and sale of electricity to any person, and also specify, for purchase of electricity from such sources, a percentage of the total consumption of electricity in the area of a distribution licensee;

(f) adjudicate upon the disputes between the licensees, and generating companies and to refer any dispute for arbitration;

(g) levy fee for the purposes of this Act;

(h) specify State Grid Code consistent with the Grid Code specified under clause (h) of sub-section (1) of section 79;

(i) specify or enforce standards with respect to quality, continuity and reliability of service by licensees;

(j) fix the trading margin in the intra-State trading of electricity, if considered, necessary; and

(k) discharge such other functions as may be assigned to it under this Act.

(2) The State Commission shall advise the State Government on all or any of the following matters, namely:-.

(i) promotion of competition, efficiency and economy in activities of the electricity industry;

(ii) promotion of investment in electricity industry;

(iii) reorganization and restructuring of electricity industry in the State;

(iv) matters concerning generation, transmission, distribution and trading of electricity or any other matter referred to the State Commission by that Government.

(3) The State Commission shall ensure transparency while exercising its powers and discharging its functions.

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(4) In discharge of its functions the State Commission shall be guided by the National Electricity Policy, National Electricity Plan and Tariff Policy published under section 3.

178. Powers of Central Commission to make Regulations: (1) The Central Commission may, by notification make Regulations consistent with this Act and the rules generally to carry out the provisions of this Act.

(2) In particular and without prejudice to the generality of the power contained in sub-section (1), such Regulations may provide for all or any of following matters, namely:-

(a) period to be specified under the first proviso to section 14;

(b) the form and the manner of the application under sub-section (1) of section 15;

(c) the manner and particulars of notice under sub-section (2) of section 15;

(d) the conditions of licence under section 16;

(e) the manner and particulars of notice under clause (a) of sub-section (2) of section 18;

(f) publication of alterations or amendments to be made in the licence under clause(c) of sub-section (2) of section 18;

(g) Grid Code under sub-section (2) of section 28;

(h) levy and collection of fees and charge from generating companies or transmission utilities or licensees under sub-section (4) of section 28;

(i) rates, charges and terms and conditions in respect of intervening transmission facilities under proviso to section 36;

(j) payment of the transmission charges and a surcharge under sub-clause (ii) of clause (d) of sub-section (2) of section 38;

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(k) reduction and elimination of surcharge and cross subsidies under second proviso to sub-clause (ii) of clause (d) of sub-section (2) of section 38;

(l) payment of transmission charges and a surcharge under sub-clause (ii) of clause(c) of section 40;

(m) reduction and elimination of surcharge and cross subsidies under the second proviso to sub-clause (ii) of clause (c) of section 40;

(n) proportion of revenues from other business to be utilised for reducing the transmission and wheeling charges under proviso to section 41;

(o) duties of electricity trader under sub-section (2) of section 52;

(p) standards of performance of a licensee or class of licensees under sub-section (1) of section 57;

(q) the period within which information to be furnished by the licensee under sub-section (1) of section 59;

(r) the period within which the cross-subsidies shall be reduced and eliminated under clause (g) of section 61;

(s) the terms and conditions for the determination of tariff under section 61;

(t) details to be furnished by licensee or generating company under sub-section (2) of section 62;

(u) the procedures for calculating the expected revenue from tariff and charges under sub-section (5) of section 62;

(v) the manner of making an application before the Central Commission and the fee payable therefor under sub-section (1) of section 64;

(w) the manner of publication of application order under sub-section (2) of section 64;

(x) issue of tariff order with modifications or conditions under sub-section (3) of section 64;

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(y) the manner by which development of market in power including trading specified under section 66;

(z) the powers and duties of the Secretary of the Central Commission under sub-section (1) of section 91;

(za) the terms and conditions of service of the Secretary, officers and other employees of Central Commission under sub-section (3) of section 91;

(zb) the rules of procedure for transaction of business under sub-section (1) of section 92;

(zc) minimum information to be maintained by a licensee or the generating company and the manner of such information to be maintained under sub-section (8) of section 128;

(zd) the manner of service and publication of notice under section 130;

(ze) any other matter which is to be, or may be, specified by Regulations.

3. All Regulations made by the Central Commission under this Act shall be subject to the conditions of previous publication.

181. Powers of State Commissions to make Regulations. –(1) The State Commissions may, by notification, make Regulations consistent with this Act and the rules generally to carry out the provisions of this Act.

(2) In particular and without prejudice to the generality of the power contained in sub-section (1), such Regulations may provide for all or any of the following matters, namely: -

(zd) the terms and conditions for the determination of tariff under section 61;

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9. As is apparent from a reading of Section 61 of the Act of

2003, it requires the appropriate Commission to specify the

terms and conditions for determination of tariff. The terms

and conditions of tariff can only be specified by the

Regulations as mandated by sub-clause (62) of Section 2 of the

Act.

10. The learned counsel for the Industrial Consumers laid

much stress on the word ‘shall’ in Section 61 of the Act of

2003 and argued that framing of the Regulations by the

Commission is a mandatory requirement that must be

complied with before the Commission resorts to determination

of tariff under the provisions of Section 62 of the Act of 2003.

In other words, the submission of the learned counsel for the

Industrial Consumers is that tariff cannot be determined by

the Commission without the existence of the Regulations.

11. Undoubtedly, Section 61 of the Act of 2003 requires that

the appropriate Commission shall specify the terms and

conditions for determination of tariff but it does not prescribe

that the determination of tariff, which takes place under

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Section 62 thereof, will not be undertaken by the Commission

in the absence of the Regulations.

12. The Act of 2003 came into operation on June 10, 2003.

Sub-section (1) of Section 82 of the Act of 2003 mandatorily

requires every state government to constitute a Regulatory

Commission in the State within six months from the appointed

date viz. April 10, 2004. The States, which had earlier not

constituted the Regulatory Commission under the Act of 1998,

have constituted it under the Act of 2003. Under the first

proviso to Section 82 of the Act of 2003 the Electricity

Regulatory Commission established by the State Government

under Section 17 of the Act of 1998 and functioning as such

immediately before June 10, 2003 shall be the State

Commission for the purposes of the Act of 2003. When the

Act of 2003 came into force, the Central Electricity Regulatory

Commission was already functioning, as the same was

established under Section 3 of the Act of 1998, and by a

deeming fiction created by virtue of Section 76(2) of the Act of

2003, it is the Central Commission for the purposes of the Act

of 2003.

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13. After coming into force of the Act of 2003 and

Constitution of the State Regulatory Commission, a mandatory

duty under Section 62 thereof has been cast on the Regulatory

Commission to determine tariff. The duty cast on the Central

and State Commission to determine tariff is also reflected by

Sections 79 and 86 of the Act of 2003. While Section 79

specifies the functions of the Central Commission, Section 86

lays down the functions of the State Commission. Section 79,

inter-alia, provides that the Central Regulatory Commission

shall discharge the functions to regulate tariff of generation

companies owned or controlled by the Central Government. It

also entrusts the central Commission to regulate the tariff of

generating companies, other than those, owned and controlled

by the Central Government in case such generating companies

enter into or otherwise have a composite scheme for

generation and sale of electricity in more than one State.

Similarly, Section 86, inter-alia, provides that the State

Commission shall discharge the functions of determining the

tariff for generation, supply, transmission and wheeling of

electricity, wholesale or bulk or retail, as the case may be,

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within the State. Thus, Sections 79 and 86, besides Section

62, cast a mandatory obligation and duty on the respective

Commission to determine tariff. Determination of tariff cannot

brook any delay in view of the revenue requirements of the

generators and licensees. It was for good reason the Act of

2003, nowhere prescribes that fixation of tariff shall be made

after the framing of the Regulations under Section 61 thereof.

Otherwise, determination of tariffs by the Commissions could

be delayed inordinately. We, however, hasten to add that it is

not our view that the appropriate Commission is exempt from

framing Regulations or they can frame them at their

convenience. In case Regulations are not framed by a

Regulatory Commission, surely the Tribunal is not powerless

to direct the Commission to frame the Regulations. Under

Section 121 of the Act of 2003, the Tribunal is empowered to

issue such orders, instructions or directions as it may deem fit

to any appropriate Commission for performance of its

statutory functions under the Act.

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14. It also needs to be noted that Section 178(1) of the Act of

2003, while empowering the Central Commission to make

Regulations, has provided that the Central Commission may

by Notification make Regulations consistent with the Act and

the Rules generally to carry out the provisions of this Act.

Likewise, Section 181(1) of the Act of 2003 provides that the

State Commissions may make Regulations. It is not only in

sub-section (1) of Section 178 and sub-section (1) of Section

181 that the word ‘may’ has been used, even in sub-section (2)

of Section 178 and sub section (2) of Section 181 the word

‘may’ has been used in contrast to the word shall. These are

enabling provisions to arm the respective Commissions with

the power to frame Regulations to provide for matters

enumerated therein including those mentioned in clause (s) of

sub-section (2) of Section 178 and clause (zd) of sub-section

(2) of Section 181. Without prejudice to the generality of the

powers comprised in sub-section (1) of both the provisions

(Sections 178 & 181), sub clause(s) of sub-section (2) of

Section 178 and clause (zd) of sub-section (2) of Section 181

empower the Central Commission and the State Commission

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respectively to frame Regulations providing for terms and

conditions for determination of tariff under Section 61.

15. Neither Section 61 nor Section 178(2)(s) or Section 181

(2) (zd) of the Act of 2003 are indicative of any compulsion on

the part of the Commission to determine tariff only after

framing of the Regulations. Pressing necessity to determine

tariff cannot be postponed or overlooked for want of

Regulations, which could not be framed in a short time.

Although the need and importance of framing the Regulations

cannot be undermined, the non-existence of Regulations,

however, cannot be a ground for the Commission to justify

non determination of tariff by it.

16. The obligation to determine tariff by an appropriate

Commission also emanates from Section 64 of the Act of 2003.

Section 64, inter alia, provides that the appropriate

Commission shall issue tariff order or reject the application

within 120 days from the date of the receipt of the tariff

application from a generating company or a licensee and after

considering the suggestions and objections received from the

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public thereto. The legislative command to determine the tariff

under Section 64 has to be carried out by the Commission,

once an application of a generator or a licensee is received and

it cannot be stifled or diluted because of the failure of the

Commission to frame the Regulations. It is significant to note

that Section 61 of the Act of 2003 or any other provision

thereof does not specify the consequences for the failure of the

Commission to frame Regulations. This being so, the

provisions requiring the Commission to determine the tariff

cannot be held to be in-operative till such time the Regulations

are framed under Section 61 read with Sections 178 & 181 of

the Act of 2003.

17. While power is conferred on the appropriate Commission

to frame Regulations, it has also been saddled with a duty to

determine the tariff. The generating company or a licensee, as

the case may be, cannot be allowed to suffer for the delay on

the part of the Commission in the exercise of its power to

frame Regulations. The duty imposed on the Commission to

determine tariff could be well discharged without the

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Regulations, if they have not been framed, by seeking

guidance from the factors and parameters laid down in Section

61. The application of the generating company or a licensee

cannot be placed in cold storage in the absence of the

Regulations.

18. In case the tariff is not determined by the Commission on

the ground that it was not possible for it to frame the

Regulations, the generator or licensee, may not be able to

function because of the paucity of funds and such a situation

will not be in the interest of the consumers. It could not be

the intention of the Parliament to make the determination of

tariff dependent on the existence of tariff Regulations. Where

the Commission fails in its public duty to frame Regulations,

its inaction cannot be allowed to harm the interests of the

consumers, generator or licensee.

19. It needs to be highlighted, even at the risk of repetition,

that according to Section 61, the Commission is to frame

Regulations and in doing so it is required to be guided by the

parameters referred in Section 61 (a) to (i) of the Act of 2003.

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As per Section 61(i) Commission is also to be guided by the

National Electricity Policy and tariff policy in framing the

Regulations. The tariff policy was not in existence when the

impugned Tariff Orders were passed by the Commission. In

case tariff Regulations had been framed by the Commission

before passing of the impugned Tariff Orders, they would have

been framed without any guidance from the Tariff Policy. If

the argument of the learned counsel for the Industrial

Consumers is taken to its logical conclusion, then the

Regulations framed without guidance from the tariff policy

would be bad, not withstanding the fact that tariff policy was

not available as Section 61 of the Act of 2003, inter alia,

provides that the Commission shall be guided by the tariff

policy while framing the Regulations. It appears to us that

such an interpretation would be against the intent of the

legislation. There is nothing in the language of the provisions

of the Act of 2003 including Section 61 thereof, which bars the

determination of tariff, without framing of Regulations.

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20. In U.P. State Electricity Board Vs. City Board, Mussoorie

–AIR 1985 Supreme Court 883, it was held that framing of

Regulations, under Section 79(h) of the Electricity (Supply)

Act, 1948 was not a condition precedent for fixation of grid

tariff. The Supreme Court in this regard observed as follows:

“ The first contention urged before us by the City Board is that in the absence of any Regulations framed by the Electricity Board under section 79 of the Act regarding the principles governing the fixing of Grid Tariffs, it was not open to the Electricity Board to issue the impugned notifications. This contention is based on sub-section (1) of Section 46 of the Act which provides that a tariff to be known as the Grid Tariff shall, in accordance with any Regulations made in this behalf, be fixed from time to time by the Electricity Board. It is urged that in the absence of any Regulations laying down the principles for fixing the tariff, the impugned notifications were void as they had been issued without any guidelines and were, therefore, arbitrary. It is admitted that no such Regulations had been made by the Electricity Board by the time the impugned notifications were issued. The Division Bench has negatived the above plea and according to us, rightly. It is true that Section 79 (h) of the Act authorizes the Electricity Board to make Regulations laying down the principles governing the fixing of Grid Tariffs. But Section 46(1) of the Act does not say that no Grid Tariff can be fixed until such Regulations are made. It only provides that the Grid Tariff shall be in accordance with any Regulations made in this behalf. That means that if there were any Regulations, the Grid Tariff should be fixed in accordance with such Regulations and nothing more. We are of the view that the framing of Regulations under S. 79(h) of the Act cannot be a condition precedent for fixing the Grid Tariff. A similar contention was rejected by this

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Court in Mysore State Road Transport Corporation v. Gopinath Gundachar Char (1968) 1 SCR 767 : (AIR 1968 SC 464) which was a case arising under the Road Transport Corporation Act, 1950. Under S. 14 of that Act a Road Transport Corporation was entitled to appoint officers and servants as it considered necessary for the efficient performance of its functions. Under Section 34(1) of the Road Transport Corporations Act, 1950, the State Government had been empowered inter alia to issue directions to the Road Transport Corporation regarding recruitment, conditions of service and training of its employees. Under S. 45(2)(c) of that Act, the Road Transport Corporation was empowered to make Regulations regarding the conditions of appointment and service and the scales of pay of officers and servants of the Corporation other than the Chief Executive Officer General Manager and the Chief Account Officer. Admittedly no Regulations had been framed under S. 45(2) (c ) of that Act. It was contended that the Corporation could not appoint officers and servants referred to therein or make any provision regarding their conditions of service until such Regulations were made. This Court rejected the said plea with the following observation at page 770 (of SCR) : at p. 465 of AIR):- “ The conjoint effect of Sections 14(3)(b), 34 and 45(2)( c) is that the appointment of officers and servants and their conditions of service must conform to the directions, if any, given by the State Government under Section 34 and the Regulations, if any, framed under Section 45(2) (c ). But until such Regulations are framed or directions are given, the Corporation may appoint such officers or servants as may be necessary for the efficient performance of its duties on such terms and conditions as it thinks fit”.

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21. From the aforesaid observations, it is clear that the

Supreme Court held that Section 46(1) of the Act of 1948

merely requires that if there were any Regulations, the grid

tariff should be fixed in accordance with such Regulations and

nothing more. In the Electricity Act of 2003, with which we

are concerned, even this requirement of Section 46(1) of the

Electricity Supply Act, 1948, which has been highlighted by

the Supreme Court, is not there. There is no provision which

prescribes that till Regulations are framed, tariff cannot be

determined.

22. In Rajiv Anand & Ors. vs. Union of India & Ors., AIR

1998 DELHI 259, the Delhi High Court rejected the plea that

without prescribing procedure for recovery of bank dues, the

collector cannot proceed to recover the same under Section

32-G of the State Financial Corporations Act, 1951. In this

regard, the High Court held as follows:

“ the contention urged for the petitioners is that without prescribing procedure, S. 32-G cannot be invoked and given effect to. In our view, however, the absence to specify procedure by making appropriate rule or Regulation cannot nullify the legislative intent. The statutory provision cannot be held to remain a dead letter

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till such time the procedure is prescribed, in the absence of clear words in the Act which may show such an intention on the part of Legislature. We are unable to find any such intention from the provisions of the Act. Under the Act the procedure is to be prescribed by either State Government framing the rule or Board framing requisite Regulations. The provisions in the Act do not show operation of S. 32-G would depend upon the action of the State Government or the Board and on account of their inaction, the legislative intent would remain in abeyance. In absence of the procedure being prescribed, the authority under S. 32-G would be required to follow and apply such procedure which is just, fair and reasonable and is in consonance with the principles of natural justice. We are unable to accept the aforesaid contention See : The Mysore State Road Transport Corporation v. Gopinath Gundachar Char, AIR 1968 SC 464, U.P. State Electricity Board v. City Board, Mussoorie, AIR 1985 SC 883: (1985 All LJ 243) and Surinder Singh v. Central Government, AIR 1986 SC 2166. These decisions would also show that there is no legal impediment in enforcing the statutory provisions like S. 32 G in absence of prescribed procedure”.

23. In the case of S. Bharat Kumar & Ors. Vs. Government of

A.P. & Ors., 2000 (6) ALT 1 (D.B.), it was contended before a

Division Bench of the Andhra Pradesh High Court that

Andhra Pradesh State Electricity Regulatory Commission has

not prescribed the terms and conditions for the determination

of the licensee’s tariff in accordance with Section 26(1) and (2)

of the Andhra Pradesh Electricity Reform Act, 1998 and

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therefore, the entire exercise undertaken by the Commission

in fixing the tariff is vitiated in law. Repelling the arguments,

the Andhra Pradesh High Court held as follows:

“ We cannot accept this contention. There is no quarrel with the proposition that framing of Regulations, Bye-laws or Rules as contemplated by the Act is not a condition precedent for enforcing the main provisions of the Act if they are otherwise capable of being enforced without reference to such subordinate legislation. If an authority is needed, we may refer to the case of UPSEB vs. City Board, Mussuori. There is nothing in the language of sub-sec. (2) of Section 26 which obligates the Commission to frame the Regulations before dealing with the tariff determination. We find no force in the contention that the procedure and methodologies laid down for calculating the expected revenue from charges by the licencee could be done only by way of Regulations. Such guidelines or methodologies are primarily meant for the guidance of the licencee. It is not necessary that they should be published in the form of Regulations. The public will in no way be handicapped to file their objections against the tariff proposals submitted by the licencee for the reason that the procedure and methodology is not published before hand. Moreover, the objector is at liberty to approach the Commission for furnishing the copy of such procedures and methodologies prescribed under sub-sec. (1) of Sec. 26. The existence of enabling provision under sub-sec. (2) for making the Regulations cannot be pressed into service in support of the contention that the prescription of procedures and methodologies under sub-sec. (1) shall also be by way of Regulations. There is no compelling reason to either read the word ‘may’ as ‘shall’ in sub-sec. (2) or to project the provisions of sub-sec. (2) into sub-sec. (1)”.

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24. The decision of the Andhra Pradesh High Court in the

aforesaid matter was carried in appeal to the Supreme Court

in the case of Association of Industrial Electricity Users Vs.

State of A.P. & Ors., (2002) 3 Supreme Court Cases 711. The

Supreme Court while dismissing the appeal and upholding the

order of the Andhra Pradesh High Court observed as follows:

“The High Court has at length considered all aspects of the cases and has examined in detail the exercise which was undertaken by the Commission in fixing the tariff and, in our opinion, the view expressed by the High Court calls for no interference”.

25. In the case of Surinder Singh Vs. Central Government &

Ors., IR 1986 Supreme Court 2166, it was held that where a

statute confers powers on an authority to do a certain act or

exercise power in respect of matters, subject to rules, the

exercise of power conferred by the statute does not depend on

the existence of Rules unless the statute expressly provides for

the same. Explaining the expression “subject to the Rules”,

the Supreme Court observed that it only means in accordance

with the rules, if any, and in case any rules are framed, the

powers so conferred on authority could be exercised in

accordance with the rules. But if no rules are framed, there is

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no hiatus and the authorities are not precluded from

exercising the power conferred by the statute.

26. In the case of T. Cajee Vs. U. Jormanik Siem, AIR 1961

Supreme Court 276, the Supreme Court set aside the order of

the High Court, whereby the order of the District Council

removing SIEM was quashed on the ground that the District

Council had not framed any law for the exercise of its powers

as contemplated by para 3(1)(g) of the Sixth Schedule to the

Constitution. The High Court was of the opinion that till a law

as contemplated by para 3(1)(g) was made, the District Council

could not exercise power of either appointment of a SIEM or

his removal. The Supreme Court reversing the order of the

High Court held that the Administration of the district

including the appointment or removal of SIEM could not come

to a halt till law under para 3(1)(g) was made.

27. In B.N. Nagarajan & Ors., etc. vs. State of Mysore & Ors.

etc., AIR 1966 Supreme Court 1942, Rule-8 of the Mysore

State Civil Services (General Recruitment) Rules, 1957 came

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up for consideration. The Rule was to the following effect:

“ Method of recruitment, - Recruitment to the State Civil Services shall be made by the competitive examination or by promotion. The method of recruitment and qualifications for each State Civil Service shall be as set forth in the rules of recruitment of such service specially made in that behalf”.

28. It was contended before the Supreme Court that the

words “shall be as set forth in the rules of recruitment of such

service specially made in that behalf”, clearly show that till the

rules are made in that behalf no recruitment can be made to

any service. Rejecting the contention, the Supreme Court held

that in case there was a statutory rule on the matter, the

administration must abide by that rule and it cannot act

contrary to the rule but it does not imply that till the rules are

framed, no recruitment can be made to any service. Applying

the analogy to the instant case, it could not have been the

intention of the Legislature to make the exercise of power

under Section 62 to determine tariff dependent upon the

existence of tariff Regulations as a pre-condition.

29. The learned counsel for the Industrial Consumers

pointed out that as per Section 45(5) of the Act of 2003, the

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charges fixed by the distribution licensee are required to be in

accordance with the provisions of the Act and the Regulations

made in this behalf by the concerned State Regulatory

Commission. It was contended on behalf of the Industrial

Consumers that unless Regulations are framed, the charges

cannot be fixed by the distribution licensee. Drawing

inspiration from Section 45(5), it was canvassed by the learned

counsel for the Industrial Consumers that the tariff

determination is dependent upon the existence of Tariff

Regulations as a pre- condition. This interpretation placed by

the learned counsel for the Industrial Consumers on Section

45(5) and the inference drawn there from do not seem to be

correct. Section 45(5) does not provide that no charges can be

fixed by the distribution licensee until Regulations are framed.

Section 45(5) simply means that if Regulations have been

made by the Regulatory Commission, the charges should be

fixed by the distribution licensee not only in accordance with

the provisions of the Act but also in consonance with the

Regulations and nothing beyond it. This interpretation is in

conformity with the decision of the Supreme Court in U.P.

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State Electricity Board Vs. City Board, Mussoorie (supra). In

that case the Supreme Court was, inter alia, dealing with the

interpretation of Section 46(1) of the Electricity (Supply) Act,

1948 which provided that the grid tariff shall be in accordance

with any Regulations made in this behalf. The Supreme Court

held to the effect that if any Regulations were in existence, the

Grid Tariff shall be fixed in accordance with such Regulations

and in case the Regulations have not been framed, the charges

are to be fixed by the distribution licensee only in accordance

with the provisions of the Statute.

30. Having regard to the aforesaid discussion and the

judgments of the Supreme Court, we are of the opinion that

the Commission may be under a legal obligation to frame the

Regulations but the existence of Regulations is not a condition

precedent for determination of tariff under Section 62 of the

Act of 2003. The Act of 2003 does not intend that power to

determine tariff should remain in suspended animation till

tariff Regulations are framed. The exercise of power conferred

by the statute on the Commission to determine the tariff does

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not depend upon the existence of Regulations since the

Statute does not provide so.

31. The Learned Counsel for the Industrial Consumers

submitted that when the statute requires a particular thing to

be done in a particular manner that thing must be done in

that manner alone and in no other manner. In support of this

principle, the Learned Counsel relied upon the decisions of the

Supreme Court in Babaji Kondaji Garad vs. Nasik Merchants

Co-op. Bank Ltd. 1984 (2) SCC, 50 and A.R. Antulay vs.

Ramdas Sriniwas Nayak- 1984 (2) SCC, 500. There can be no

quarrel with this proposition but as already noticed the

framing of the Regulations is not a pre-condition for exercise of

power under Section 62 of the Act of 2003.

32. Some of the learned counsel for the Industrial

Consumers relied upon the decisions of the Supreme Court

J.K. Cotton Spinning & Weaving Mills vs. State of U.P. , 1961

(3) SCR 185 and Krishan Kumar Vs. State of Rajasthan, 1991

(4) SCC 258. These decisions are of no avail to the Industrial

Consumers as the provisions of the Act of 2003 are different.

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33. Before concluding the discussion on the issue in

question, we may point out that our attention was drawn to

para 1.3 of the Tariff Order dated November 30, 2004 for the

year 2004-05 and para 1.3 of the Tariff Order dated June 14,

2005 for the year 2005-06. From a perusal of these paras, it

appears that the Commission with a view to continue the

existence of the Punjab State Electricity Regulatory

Commission’s Tariff Regulations, 2002 (for short Regulations

of 2002) issued a notification dated July 8, 2004 and decided

to follow the procedure prescribed by the Regulations of 2002

until the new Regulations are framed by the Commission

under the Act of 2003. It was also submitted that the Tariff

Regulations framed under the Act of 1998 were not

inconsistence with the Act of 2003 and therefore, in any event

it was not a case where tariff was determined without the

existence of the Regulations. On the other hand it was argued

on behalf of the Industrial Consumers that the tariff

Regulation framed under the Act of 1998 had ceased to be

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operative w.e.f. June 9, 2000 and Notification of July 8, 2004

could not have the effect of reviving the same.

34. The arguments of the learned counsel for the Industrial

Consumers appear to be correct. According to the proviso to

Section 61 of the Act, the terms and conditions for

determination of tariff framed under the Electricity (Supply)

Act 1948, Act of 1998 and the enactments specified in the

schedule thereto shall continue to apply for a period of one

year or until the terms and conditions for tariff are specified

under Section 61, whichever is earlier. It cannot be disputed

that Sections 1 to 120 and Section 122 to 185 of the Act of

2003 came into force on June 10, 2003. In accordance with

the proviso to Section 61 the earlier Regulations were to

remain in force for a period of one year. The period of one year

expired on June 9, 2004 but the Notification seeking to

continue the earlier Regulations was issued on July 8, 2004.

In other words, the Regulations on the date of issue of the

aforesaid notification were no longer in existence and

therefore, they could not be revived by that notification.

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35. The Learned Counsel for the Board and the Commission

then submitted that assuming it was not possible to revive the

earlier Regulations on the ground that the Notification was

issued after the stipulated period of one year, but there was no

legal impediment for the Commission to follow and adopt the

procedure laid down in the Tariff Regulation issued in

accordance with the Electricity Regulatory Commissions Act,


countering the submissions of the Board and the Commission

contended that since Section 181(3) of the Act of 2003,

providing for previous publication of Regulations was not

complied with, the earlier Regulations could not be validly

adopted by the Commission. The learned counsel for the

Industrial Consumers in order to buttress their submissions

relied upon the decision of the Supreme Court in Ramakrishna

Vivekananda Mission Vs. State of West Bengal & Ors., Civil

Appeal Nos. 3232-3234 of 2000, decided on November 29,

2004.

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36. It appears to us that it was not necessary for the

Commission to meet the requirement of previous publication

of the Regulations, in view of the Electricity (Removal of

Difficulties) Ninth Order 2005, issued by the Central

Government. Paras 2 and 3 of the Ninth Order of 2005

are relevant and it will be useful to set out the same :-

“ 2. Previous publication of Regulations made by the State Commissions :-Regulations made by the State Commissions, before the commencement of this order, without meeting the requirement of the previous publication under sub-section (3) of Section 181 of the Act shall again be published as draft Regulations for the information of persons likely to be affected thereby for inviting the objections or suggestions following the procedure prescribed under the electricity (Procedure for Previous Publication) Rules, 2005, and shall be finalized after considering such objections or suggestions received. 3. Action taken under Regulations: - Any action taken under the Regulations made by the State Commissions, before the commencement of this order, without following the requirement of previous publication shall not be deemed invalid merely on the ground of non-compliance of previous publication of Regulations.”

37. The Central Government issued the order in exercise of

the powers conferred on it under Section 183 (1) of the Act of

2003 for removal of difficulties in giving effect to the provisions

of the Act. It appears to us that once the Central Government

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is empowered to issue an order for removal of difficulties in

giving effect to the provisions of the Act, it will be legitimate for

the Central Government to issue an order. This principle is

deducible from the decision of the Supreme Court in Madeva

Upendra Sinai & Ors. Vs Union of India & Ors. (1975) 3 SCC

765, wherein it was observed as follows:

“Now let us turn to clause (7) of the Regulation. It will be seen that the power given by it is not uncontrolled or unfettered. It is strictly circumscribed, and its use is conditioned and restricted. The existence or arising of a “difficulty” is the sine qua non for the exercise of the power. If this condition precedent is not satisfied as an objective fact, the power under this clause cannot be invoked at all. Again, the “difficulty” contemplated by the clause must be a difficulty arising in giving effect to the provisions of the Act and not a difficulty arising aliunde, or an extraneous difficulty. Further, the Central Government can exercise the power under the clause only to the extent it is necessary for applying or giving effect to the Act, etc., and no further. It may slightly tinker with the Act to round off angularities, and smoothen the joints or remove minor obscurities to make it workable, but it cannot change, disfigure or do violence to the basic structure and primary features of the Act. In no case, can it, under the guise of removing a difficulty, change the scheme and essential provisions of the Act.”

38. It seems to us that the Central Government appears to be

conscious of the fact that the Electricity Regulatory

Commission after being constituted is required to determine

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the tariff at the request of the utilities on urgent basis so that

they could meet their revenue requirements. Framing of

Regulations is a time consuming process. It may have been

difficult for the newly established Commission under the Act of

2003 to frame regulations and follow the requirement of

previous publication of the Regulations etc. within a short

time before it was called upon to determine the tariff. The

Central Government being conscious of the problem issued the

Electricity (Removal of Difficulties) Ninth order 2005. In case

the Central Government had not issued the said order the

legislative intent exhibited in Sections 62, 64, 79 and 86 etc.

may have remained in abeyance.

39. The Commission for determining tariff issued a public

notice in leading newspapers inviting objections to the tariff

proposals from the general public. By public notice, objectors

were advised to file their objections with the Secretary of the

Commission with advance copy to the PSEB. Thereafter,

notice of public hearing was given. The procedure obviously

was followed under the tariff Regulations framed under the

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Electricity Regulatory Commissions Act, 1998. In case public

notice had not been issued, it would have been challenged on

the ground of violation of the principles of natural justice.

Even when the procedure complying with the principles of

natural justice has been followed by the Commission by

adopting the tariff Regulations, 2002, issued in accordance

with the Act of 1998, it is still being challenged on the

ground that the Commission could not have followed that

procedure since the earlier tariff Regulations were no longer

in vogue. It appears to us that the Commission had adopted a

just and fair procedure in accordance with the principles of

natural justice. It has not been shown by the Industrial

Consumers as to how they have been prejudiced by the

procedure followed by the Board. It is also not shown that the

procedure followed by the Commission, as laid down in the

Regulations framed under the Act of 1998, in the instant case

is contrary to the factors enumerated in Section 61 of the Act

of 2003.

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40. In view of the aforesaid discussion we hold as follows:

(i) Framing or existence of the Regulations is not a condition precedent or a sine qua non for determination of tariff by the Regulatory Commission;

(ii) Tariff determination undertaken in the absence of the Regulations does not contravene the provisions of the Act of 2003;

(iii) In any event the PSEB had adopted a fair procedure apart from following the Regulations of 2002.

(iv) Consequently, the contentions advanced by the Industrial Consumers stand rejected as indicated above.

B. Allocation of the Cost of Ranjit Sagar Dam Project:

41. Before the establishment of the Commission, the State

Government had allocated the capital cost of Ranjit Sagar

Dam between the Punjab State Electricity Board (PSEB) and

the Irrigation Deptt. While 79.1% of the cost was allocated

towards power component, 20.9% cost was allocated to the

Irrigation Deptt. The learned counsel for the Industrial

Consumers submitted that the aforesaid apportionment made

by the State Government was absolutely arbitrary and the

PSEB has been unjustifiably burdened with huge unjustified

cost, which has resulted and is continuously resulting in

fixation of higher tariff. This position which has been taken by

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the Learned Counsel for the Industrial Consumers has been

echoed by the Commission in its various tariff orders. This is

apparent from tariff orders for the years 2002-03, 2003-04,

2004-05 and 2005-06. At this stage, it will be useful to set out

the observations of the PSERC alongwith the views of the

PSEB and the stand of the consumers expressed before it in

this regard:-

“Tariff Order 2002-03:

“5.11 Ranjit Sagar Dam Project:

Objections Raised:

RSD Project :

Another matter of relevance for the financial health of PSEB and for the interest of the consumers is the apportionment of the assets and liabilities of RSD project, in the ratio of 79:21 between PSEB and the Irrigation Deptt. The completion of the project was inordinately delayed and this resulted in heavy cost escalation. Further, due to certain reasons, one of which is the unfinished Shahpur Kandi Project, the RSD Project’s generation of energy for the PSEB is far below the rated capacity, although the Board has been burdened with the interest cost of the full debt burden and repayment liabilities thereof. The electricity consumers are rightly claiming that they have to pay unjustified costs on account of (i) unfairly large debt transferred to PSEB, even when the RSD Project cannot be said to be a completed project till the completion of Shahpur Kandi Project and (ii) higher depreciation and ROR charges on a grossly overvalued

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asset . Quite clearly, there is a lot of force in the grievance of the consumers.

Role of the Government: It is generally said that the accumulated losses, like profits belong to the owners. Then there is the aspect of piled up subsidies which have not been paid by the Government. Furthermore, if the reform process is to move ahead and then succeed, it is vital that all historical liabilities, whatever be their cause, must be liquidated at the earliest and possibly, in one go. Thus, a sweeping Balance Sheet Restructuring Plan through a drastic approach is an inescapable responsibility cast on the Government. This has been done by most of the States where such a situation existed. If an FRP is put in operation, further gains for the Board could be expected as the costly interest debt is exchanged for cheaper one.

In response to specific queries from the Commission, the State government has conveyed its willingness to consider a Financial Restructuring Plan to clean the PSEB Balance sheet and also to address the issues raised with regard to the RSD project. The Commission earnestly hopes that these exercises will be completed expeditiously well before the Commission is called upon to pass its next tariff order.

Tariff Order 2003-04:

“5.11 Ranjit Sagar Dam Project:

Objections Raised:

CII pointed out that as directed in the earlier Tariff Order, the apportionment of cost, which was adopted by the Government, is required to be reviewed and with this, the value of capitalization of RSD will work out to Rs. 1500 crores against Rs 4607.48 crores now adopted. As the Government is delaying the decision, Commission is

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empowered to take a decision, as per Supreme Court Judgement on October 3, 2002, which upholds the autonomy of the Commission. PSEB Engineers’ Association pleads with the Commission to issue suitable instructions to Government of Punjab for more equitable cost sharing of RSD project between Irrigation and Power with 20% charged to Power and 80% to Irrigation.

PSEB’s Response:

The PSEB submitted that, it is representing to the Government of Punjab, for equitable cost of RSD project, since 1985 and no positive response is received for the Government.

Views of the Commission: The Commission has conveyed the concern of the consumers in this regard and requested the Government for reallocation of the cost of RSD project between Irrigation and Power Departments”.

In the annual revenue requirement for the year 2003-04, the PSEB Stated that the matter relating to RSD cost to PSEB was taken up with the Government vide letter dated November 2003 for rationalizing the allocation of cost between irrigation Deptt. and the PSEB. The Board highlighted in the ARR the irrational allocation which was costing the Board Rs. 428 crores at an average recovery rate of Rs. 2.25 KWh from the consumers. The Board also Stated that it had cited the cost of Uttar Pradesh Jal Vidyut Nigam Ltd.(UPJVNL) wherein an apportionment of 70-75% was made for civil works and 30-25% for electro-mechanical works for Dam based projects. Even the State of Punjab accepted the position that the allocation cost of Ranjit Sagar Dam project does not benefit the consumers and ought not be passed on to them. This observation of the Government was recorded by the

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Commission in Para 5.27 (h) of Tariff Order of 2002-03. It will be useful to set out the said stand of the government:- “(h) Interest Charges: It has been commented that since determination of tariff is on cost plus basis, there is need to ensure that before taking up any project, the viability of the project and its utility to the consumer is properly looked into. The issue assumes more importance keeping in view that operation of electricity industry is of monopolistic nature. Statutes provide for determination of tariff on ‘cost plus’ basis where all costs are passed on to the consumers. However, the intention of the law cannot be that costs which do not result into benefits to the consumers are also passed on to them. In this connection the State government cited two projects – Ranjit Sagar Dam Project and SYL Project and suggested disallowing interest on the loan borrowed for the above two projects.

It has also been observed that the Board shall take advantage of falling interest rates and explore the possibilities of replacing high cost borrowings with borrowing at current interest rates.”


Cost of Ranjit Sagar Dam Project: High cost of Ranjit Sagar Dam Project has been a cause of concern for the Commission. The Commission has commented upon this issue in its earlier two Tariff Orders also. As already pointed out therein, time over-run of the project of over a decade resulted in huge cost over-run and the project conceived at a cost of about Rs. 700 crores was finally executed a cost of Rs. 5700 crores. Of the total cost of the project, the sharing of cost was in the ratio of 79.1 % and 20.9% for the PSEB and Irrigation Deptt. respectively. Even the cost rightfully to be apportioned to

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the Irrigation Deptt. representing 20.9% was not taken over by the State Government. This resulted in over burdening the Board substantially. The Commission already disallowed this portion of cost amounting to Rs. 1444 crores for the purpose of determining Annual Revenue Requirements of the Board in its last two tariff orders. The consumers, on their part, have also been highly critical of the exorbitant cost of this project and have pointed out that the cost of power from this project works out to over Rs. 6 per unit. It has been further stated that even purchase of power from the costliest sources will be cheaper than this power and the Board should not be forced to take over the project at this cost. The Commission has been very concerned about the high cost of the project and has suggested to the government to look into this aspect and come up with solutions. No progress in this regard, however, seems to have been taken place as the cost continues to be reflected in the Balance sheet and Annual Revenue requirement of the Board as before. The Commission would again like the Board and the Government to look into this issue and respond so that a justifiable and rightful solution is found. The Commission will give its final view thereafter.


Objections raised:

CII and SFAI have submitted that excessive costs in the form of interest, depreciation and Rate of Return (ROR) pertaining to over allocated amount to RSD project should be disallowed (RSD capitalization is overstated by Rs 2719 crores) and not passed on to the consumers.

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SIEL Ltd. and PACL have objected that the cost of the RSD project apportioned to Irrigation Deptt. is yet to be taken over by GoP and as a result, consumers are being burdened through tariff. Siel Ltd. has further Stated that as the average PLF of hydel projects is 50%, therefore, only 50% of total capital cost of Rs. 5340.3 crores should be capitalized and the balance should be borne by GoP. The reduction in ARR on this account should be taken forward as Regulatory Reserve with interest and benefit given to consumers in the ensuing years. Response of PSEB: The Board has informed that the Commission had, in its last Tariff order, advised the GoP and the Board to look into the matter. The Board is discussing the matter with GoP and once the consultations reach a final stage, details shall be furnished to the Commission. View of the Commission: The issue is already discussed in detail in Chapter 8, para 8.4 of Tariff Order 2004-05. The Board should take up the matter earnestly with the Government for early settlement of the issue.”

42. From the above observations of the Commission, it is

apparent that the Commission felt deeply disturbed on

account of the allocation of 79.1% of the capital cost of the

Ranjit Sagar Dam to the account of Punjab State Electricity

Board. The Commission has been asking the State

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Government to look into the apportionment of the capital cost

allocated between PSEB and Irrigation Department. But the

State Government has done precious little in this behalf to

rectify the imbalance even though the State itself felt that the

allocation of cost of RSD project does not benefit the

consumers and ought not to be passed on to them (see para

5.27(L) of Tariff Order of the year 2002-03 and para 5.11 of

Tariff Order of the year 2003-04).

43. The Commission has voiced its concern not only for the

high cost of Ranjit Sagar Dam allocated to the Board but also

about the apathy of the State towards solving the problem. It

has been pointed out by the Commission in para 8.4 of the

Tariff order for the year 2004-05 that time overrun of the

project of over a decade has resulted in huge cost over run and

the project conceived at a cost of about Rs. 700 crores was

finally executed at a cost of over Rs. 5,700 crores. From the

various tariff orders of the Commission, particularly tariff

order for the year 2004-05, it is obvious that even the cost

allocated to the Irrigation Department, was actually not borne

by the State Government. The entire capital cost of the RSD

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project was placed on the PSEB until the Commission

intervened and disallowed the capital cost of Rs. 1444 crores,

allocated to the Irrigation Department, for the purpose of

determining annual revenue requirement of the Board. Inspite

of said reduction by the Commission, the consumers are still

being burdened with 79.1% of the cost of RSD project. It is

an inequitable burden, which has been unjustly and unfairly

placed on the consumers of electricity in the State of Punjab.

It is not denied that the load of this allocation is being

continuously reflected in the ARRs of the Board and the tariff

determined by the Commission. It was a clear mistake to load

79.1% the cost of the RSD Project on the Board. The

Commission has not been able to rectify the mistake, as it was

of the view that the apportionment was done prior to the

establishment of the Commission and the project was also

executed before its coming into being. The Commission,

therefore, merely hoped that the State Government will

undertake an exercise for financial restructuring of the Board

to clean up its balance sheet. It appears as if the State

Government is not obliged under law to listen to the PSERC.

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Result is that this abominable injustice to the consumers

continues.

44. The consumers have been suffering for the last so many

years for the error committed by the State in allocating 79.1%

cost of the project to the Board. Allocation of the cost is a

tariff issue. The consumers who are being continuously

affected by the allocation did not have a say in the matter.

The mistake can not be allowed to continue ad infinitum.

Relief must be given to the consumers on the analogy of the

maxim Actus Curiae Neminem Gravabit, which means that

no one should suffer for the mistake of the court. There is no

reason why on the analogy of this principle, which applies to

the act of the court, should not be applied and extended to the

mistake of an authority like the Commission and the State,

discharging quasi judicial or/and even administrative

functions, which adversely affects the people at large and

cause grave injustice and harm to them. The wrong must be

rectified and they need to be relegated to a situation in which

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they would have been placed had that mistake not taken

place.

45. In Jang Singh Vs Brij Lal and Ors., AIR 1966 SC 1631,

the Supreme Court applying the aforesaid principle held as

follows:

“There is no higher principle for the guidance of the court than the one that no act of courts should harm a litigant and it is the bounden duty of courts to see that if a person is harmed by a mistake of the court he should be restored to the position, he would have occupied but for that mistake”.

46. In M/s Indian Export House Pvt. Ltd, New Delhi & Anr.

Vs J.R. Vohra, AIR 1983 Delhi 167, the Delhi High Court

noticing the doctrine held as follows:

10. “To throw out the occupant on the road and make him move to other premises and then to hear his objections is to prejudge the matter and will do violence to the provisions of law as interpreted by the Supreme Court. If a party is required to be heard before giving vacant possession under the law, then not to do so is not a mere violation of principles of natural justice, but is a violation of the statute itself. Post decisional remedial hearing is permissible in cases on which the action taken is urgent and could not have brooked any delay without irreversible result. Eviction of a tenant is not at all an urgent matter and he cannot be ousted on the assurance that he will be heard after the damage has been done. The principles of natural justice cannot

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be allowed to be by passed in this matter. Speed in justice is desirable but haste is depreciable. “ To issue a warrant for recovery of possession without a show cause notice and without holding an adequate inquiry into the objections, if any, of the tenant is a mistake made by the court and where the court has made a mistake, the mistake should be rectified by the court and the party should be relegated to the position as it stood before. Actus Curiae neminem gravabit act of the court should do not harm to the litigant.”

(emphasis supplied)

47. To the same effect is the decision of the Supreme Court

in Johri Singh Vs such Pal Singh and Ors. AIR 1989 SC 2073,

wherein it was held as follows:-

“The single strand running though all these decision is that no litigant should be prejudiced and made to suffer because of a wrong order of the court. The principle has been crystallized in the maxim actus curiae neminem gravabit. This salutary principle has held sway for a very long time and cannot be allowed to be diluted in the instant case.

48. In A.R., Antulay Vs R.S. Nayak, (1988) 2 SCC 602, the

appellant, who was an Ex-Chief Minister of the State of

Maharashtra, was charged with criminal offences triable under

Criminal Law Amendment Act 1952 (for short 1952 Act). The

appellant could not be tried in accordance with the 1952 Act

because of the earlier order of the Supreme Court directing the

transfer of his case pending before the Court of Special Judge,

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Bombay to a sitting Judge of the Bombay High court. In the

subsequent proceedings, the Supreme Court held that the

appellant had a right to be dealt with under 1952 Act, as that

was the only procedure established by law. The Court

applying the principle comprised in the maxim Actus Curiae

neminem gravabit – Act of the court shall prejudice no man

rectified the earlier mistake and re-transferred the matter to

the Court of Special Judge. In this regard the Supreme Court

held as follows:

“83…The basic fundamentals of the administration of justice are simple. No man should suffer because of the mistake of the court. No man should suffer a wrong by technical procedure of irregularities. Rules or procedures are the handmaids of justice and not the mistress of the justice. Ex debito justitiac, we must do justice to him. If a man has been wronged so long as it lies within the human machinery of administration of justice that wrong must be remedied. This is a peculiar fact of this case which requires emphasis.”

………

“ 98…It is a well settled position in law that an act of the court should not injure any of the suitors. The Privy Council in the well known decision of (Alexander) Rodger v. Comptoir D’escompte De Paris (1869-71) LR 3PC 465) 17 ER 120 observed: “One of the first and highest duties of all courts is to take care that the act of the court does no injury to any of the suitors, and when the expression ‘act of the court’ is used, it does not mean merely the act of the primary court, or of

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any intermediate court of appeal, but the act of the court as a whole, from the lowest court which entertains jurisdiction over the matter up to the highest court which finally disposes of the case. It is the duty of the aggregate of those Tribunals, if I may use the expression, to take care that no act of the court in the course of the whole of the proceedings does an injury to the suitors in the court.”

49. In the aforesaid decision of the Supreme Court, there are

observations to the effect that an act of the court shall

prejudice no one is founded upon justice and good sense and

affords a safe and certain guide for the administration of the

law. The Supreme Court also observed that to own up the

mistake when judicial satisfaction is reached does not militate

against its status or authority and perhaps it would enhance

both.

50. On the analogy of the principle behind the aforesaid

maxim and the requirements of fair play, consumers cannot

be prejudiced by the mistake of the State or the Regulatory

Commission. Injustice meted to the consumers must be

knocked down and mistake of allowing 79.1% the cost of the

RSD project on them needs to be rectified by the Regulatory

Commission. More so for the reason that the Tariff

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determination is an annual function of the PSERC, wrong

apportionment of the RSD cost by the State Government

directly affects the yearly tariff formulation by the

Commission. It is a continuous wrong which is being

perpetuated year after year. In Angalo Waterproof Ltd. Vs.

Bombay Waterproof Manufacturing Co. 1997(1) SCC 99 , it

was held that in a case of continuing or recurring wrong, there

would be corresponding continuous or recurrent cause of

action to make a grievance about the same. Therefore, on

principle the consumers are justified in making a grievance

with regard to the aforesaid allocation of the cost of the RSD

Project.

51. The question is, if the Commission in exercise of its

statutory power does not cure and allow the established

inequities created by the apportionment of the cost of the RSD

project to be perpetuated, who will treat the injury inflicted on

the consumers. State, as it seems, is impervious to the

injustice to the consumers. Healing touch must be applied by

the Commission, which is the sole authority, after the coming

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into force of the Electricity Act of 2003, vested with the

jurisdiction to determine the tariff. In case apportionment of

the cost of the RSD project is not corrected, the resultant tariff

determinations will continue to be stained with illegality and

harm the consumers.

52. An apprehension was expressed by the counsel for the

respondents that even if the Commission determines the

legitimate cost of the RSD project which can be allocated to

the Board, it will not be binding on the State as no direction

can be given to it by the Commission under the Act of 2003. It

was submitted that the Board, a statutory authority

constituted under the Act of 1948, and the State are two

different entities and a direction by the Commission to the

Board cannot be treated as a direction to the State.

Consequently, it was argued that the State may be ignore the

direction and render the same as otiose.

53. The Punjab State Electricity Board undoubtedly is a

statutory body but at the same time it is the hand and the

voice of the State Government. It is the State Government

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which has the say in the constitution and the functioning of

the Board. In this context, it will be useful to refer to some of

the provisions of the Electricity (Supply) Act, 1948,

whereunder the Board was constituted and is still operating,

as conceded by the learned counsel for the PSEB.

54. Section 5 of the Act of the 1948 authorises the State

Government to constitute State Electricity Board (SEB) by a

notification in the official gazette. As per Sub-section (2) of

Section 5, the Board is to consist of not less than three and

not more than seven Members appointed by the State

Government. Sub-section (5) of Section 5 empowers the State

Government to appoint one of the members as the Chairman

of the Board. Under Section 10 of the Act of 1948, the State

Government has the power to suspend or remove from office

any member of the Board. Sub Section (5) of Section 10

empowers the State Government to remove the Chairman and

the members of the Board and to appoint, new chairman and

members in their places. Section 12 declares that the Board

shall be a body corporate. Section 12 A makes provision for

the Board to have capital structure. For this purpose, the

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Government can direct that from a particular date, as may be

specified by a notification, the Board shall be a body corporate

with such capital, not exceeding Rs. 10 crores. The State

Government can increase the maximum limit of the capital

with the approval of the State legislature. Such capital may be

provided by the State Government after due appropriation

made by the State legislature by law for the purpose and

subject to such terms and conditions as may be determined by

the State.

55. These provisions show the pervasive control of the State

over the Board. Thus, it is clear that it is the State

Government, which is behind the façade of the statutory body.

Since almost entire population of the State of Punjab, as

consumers, is being affected by the allocation of capital cost of

RSD project, public interest demands, lifting of the veil of the

Board to see the real face behind it. Once that is done, the

State is seen behind its outward appearance in the shape of

the Board.

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56. Traditionally, the doctrine of “lifting of the veil”

enunciated in the decision of the House of Lords in Soloman

v. Soloman & Co. Ltd., 1897 AC 22, was recognized in the

corporate jurisprudence but it may be possible to apply the

principle outside the corporate jurisprudence to do justice

between the parties. The Supreme Court in Secretary,

H.S.E.B. vs. Suresh & Ors., (1999) 3 SCC 601, applied

doctrine of “lifting of the veil” in order to determine employer-

employee relationship. In this regard, the Supreme Court held

thus:-

“The High Court did in fact note with care and caution the doctrine of “lifting of the veil” in industrial jurisprudence and recorded that in the contextual facts and upon lifting of the veil, question of having any contra opinion as regards the exact relationship between the contesting parties would not arise and as such directed reinstatement though, however, without any back wages. While it is true that the doctrine enunciated in Soloman v. Soloman & Co. Ltd. came to be recognized in the corporate jurisprudence but its applicability in the present context cannot be doubted, since the law court invariably has to rise up to the occasion to do justice between the parties in a manner as it deems fit. Roscoe Pound Stated that the greatest virtue of the law court is flexibility and as and when the situation so demands, the law court ought to administer justice in accordance therewith and as per the need of the situation”.

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57. It can not be disputed that the Board is bound by the

directions of the Commission in the matters relating to tariff.

The Commission, therefore, when it works out the cost of the

RSD project, that is to be allocated to the Board, it will be

binding on the Board. Since the State and the Board are the

two sides of the same coin, the determination made by the

Commission would also bind the State as well.

58. Having held so, we would examine the question whether

the State Government independently, directly and by itself,

without being reached through the Board, will be bound by

the directions of the Commission. The answer lies in Section

61 of the Act of 2003 and Section 28 of the Act of 1998 and

other allied provisions. The Appropriate Commission while

determining tariff under Section 61 of the Act is required to be

guided by the factors and parameters enshrined therein. One

of the factors on the basis of which tariff is to be determined is

the consumer interest. Sub-clause (d) of Section 61 requires

the Commission to safeguard the interest of the consumers

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and ensure that the recovery of the cost of electricity is

effected in a reasonable manner. This was also one of the

requirements under Section 28(2)(e) of the Act of 1998. The

Commission, therefore, is/was bound to determine fair,

prudent and reasonable cost of the RSD project which is to be

allocated to the Board, in consonance with the interest of the

consumers. At the same time recovery of the cost of electricity

is/was to be made in a reasonable manner. The aforesaid

provisions of the Act of 2003 and the Act of 1998 are not

hedged in with the limitation that in case the State

Government or any other authority has allocated an

unwarranted cost to the generator or a licensee, it can not be

interfered with, even when such a cost may be imprudent and

unjust and not in the interest of the consumers. Otherwise

the cost loaded by the State Government on the Board will

have to be allowed by the Commission for the purposes of

tariff and the ARR of the Board. In case such a limitation is

read, into the aforesaid provisions, the purpose of the Act

including Section 61 will be frustrated. Since the Commission

has the power to determine the tariff and the ARR of a utility,

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it has all the incidental and ancillary powers to effectuate the

purpose for which power is vested in it. Consequently,

directions or orders of the Regulatory Commission made for

the purpose of determination of tariff and ARR in consonance

with the provisions of the Act are binding on all the concerned

parties including the State and the Board.

59. Though the Commission was of the confirmed opinion

that the State had wrongly allocated 71% cost of the RSD

project to the account of the Board, it still felt that it cannot

undo the wrong, even when the State of Punjab at one point of

time had accepted the position that the allocation of cost of

the RSD project does not benefit the consumers and ought not

be passed on to them. When the State Government even after

realizing the height of injustice meted out to the consumers,

did not do what it should have done, the Commission should

have determined the prudent cost of the RSD project which

could be fairly allocated to the Board. In such circumstances,

the Commission ought to have stepped in and activated itself,

as it was not powerless to safeguard the interests of the

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consumers in a matter which in essence is a tariff issue and

falls within its jurisdiction. But it appears that the

Commission was labouring under an erroneous belief that it

had no jurisdiction to interfere with the allocation of the cost

of the RSD project, imposed by the Government on the Board.

60. We are convinced that there is need to rectify the wrong

approach adopted by the State in allocating 79.1% of the cost

of RSD project to the Board and 20.9% of the cost of the

project to the Irrigation department. We may sum up the

reasons for this view of ours:

(i) Large share of the cost of the RSD project allocated to the Board has an impact on matters relating to depreciation, return on net fixed assets and interest burden of the loans;

(ii) On account of allocation of major portion of the cost of RSD project to the share of the Board, large debt has been transferred to it (Board), even though the RSD Project has not achieved the targeted generation due to failure to execute and complete an allied project known as Shahpur Kandi Project; (iii) Due to transfer of unfairly large debt and its carrying cost, the consumers are being made to pay unjustified costs added to the tariff.

(iv) The State Government has accepted that the allocation of cost of RSD Project does not benefit the consumers.

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(v) The State Government failed to come out with Financial Restructuring Plan for the Board. (vi) Most of the State Governments have restructured the finances of the Boards for fixation of a fair tariff and giving relief to the consumers, but the State of Punjab has failed to restructure the finances of the PSEB. 61. The mistake in allocation of cost of the RSD project

which is being called as ‘historical inequity’ by the PSEB and

the Government cannot be allowed to persist since the tariff,

inter alia, depends upon the cost of the Ranjit Sagar Dam

allocated to the Board.

62. The burden of the overvalued asset is of not of few

thousand rupees but it runs into hundreds of crores.

Approximately Rs. 500 crores per annum is being loaded in

the tariff. It is not disputed that Government is recovering Rs.

533 crores per year from the Board as interest on the

Government loans advanced to the Board. The consumers are

forced to carry the burden of high cost government loans as

the Government, as already pointed out, has so far failed to

come out with a relief package for the Board. Other loans

from the financial institutions etc. have been restructured and

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rescheduled since the interest cost of the earlier loans was too

high. But in the case of the Government loans, even when the

rates of interests have fallen, the Government is still charging

interest between 14% to 18% per annum on the loans provided

to the Board. In case the Government is allowed to have a

final say in regard to the question whether subsidy has been

paid by the Government to the Board or is still outstanding

and the matters of allocation of RSD cost, rate of interests on

loans etc., the Commission will never be able to work out tariff

in accordance with the parameters laid down in Section 61 of

the Act, rather it will be a mute spectator to the arbitrary

stand of the Government This has happened in the past and

is clearly illustrated by the tariff order of the Commission for

the year 2002-03, wherein it is mentioned that the audited

Balance Sheet of the Board for the year 2001-02 filed along

with ARR for the year 2002-03 showed an outstanding subsidy

of Rs. 5470 crores as recoverable from the State Government.

Outstanding subsidy consisted of cash subsidy and rural

electrification subsidy. The State Government took the

extraordinary and unfair stand that the RE subsidy due to the

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Board is to be limited to the amount of interest due from the

Board to the Government on the loans taken from the

Government, notwithstanding the fact that the State

Government was under an obligation to pay the subsidies in

full to the Board due to grant of free power supply at its

instance. On April 4, 2003 the Commission wrote to the State

Government specifically seeking its views with regard to

payment of unpaid subsidies. In response, the State

Government virtually told the Commission that the matter did

not fall within its (Commission) jurisdiction. The reply reads

as under:-

“(a) It is the view of the State Government that the Commission is not legally bound to resolve pending issues between the PSEB and the State Government especially those pertaining to the period before the Commission became functional.

(b) The liability of the State Government to pay R.E.

subsidy was contained within the limit of the annual interest payable by the PSEB on loans extended by the Government to the PSEB. Even this liability stood terminated by a decision of the Government during 1990-91. (However, during discussions of the representatives of Punjab Government with the Commission on 19th May, 2003, it was conceded by the Officers of the Punjab Government that Government may accept liability for RE subsidy upto the extent of annual interest

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payable by the PSEB on loans advanced by the Government. Actually, Government of Punjab has been allowing this).

(c) The State Government would address this issue

further while undertaking the financial restructuring of the PSEB”.

63. We are unable to appreciate the stand of the state

government. We are anguished to note that the PSERC felt

helpless after this reply and was of the view that it was not

appropriate for the Commission to say anything more on the

subject except to express the hope that the issue will be

resolved at an early date, finally and to the satisfaction of all

concerned. As already pointed out, the question of subsidy for

the year 2002-03 has been raised at this stage only to

illustrate that the State Government and the PSERC are under

misapprehension that the PSERC is powerless to decide such

matters. It appears that the Commission felt that it cannot

issue any directions to the Government. One baneful

manifestation of this view is that in case it is accepted that the

Commission cannot determine the capital cost chargeable to

the power component of the RSD project or it cannot deal with

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the matter relating to RE subsidies of the earlier years, when

the Commission had not been constituted, in that event

balance sheet figures of the Board imposed by the State with

regard to RSD cost, exhorbitant interest levied on Government

loans etc. will have to be accepted painfully by the

Commission year after year even at the cost of denying fair

tariff fixation to consumers. On the same reasoning it may be

argued that since no directions can be given to the State

Government by the Commission, the question whether or not

payments on account of subsidies are outstanding from the

Government to the Board, cannot be gone into by the

Commission. Consequently, in case the Government claims

that the entire amount of subsidy has been paid to the Board,

it will have to be taken as the gospel truth and the

Commission will be reduced to the status of a mere rubber

stamp of the State Government and in that event the entire

exercise for formulation of tariff will be rendered farcical. This

position is inconsistent with Section 61(d) of the Act of 2003,

whereunder the interest of the consumers have to be

safeguarded and recovery of cost of electricity is to be effected

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only in a reasonable manner. This position is also contrary

to Section 62 of the Act of 2003, according to which the

Appropriate Commission is required to determine the tariff in

accordance with the provisions of the Act.

64. For a proper determination of tariff and ARR of the

utilities suitable and binding directions can be given by the

Regulatory Commissions to the Government to achieve the

purpose of Sections 61 and 62 of the Act of 2003, particularly

clause (d) of Section 61 thereof.

65. In a nutshell, the Commission is empowered to issue

orders or directions to the State Government in regard to the

matters having a bearing on and nexus with tariff

determination. The directions of the Commission are binding

on it not only because it is the owner of the PSEB dejure and

defacto but even otherwise as well. Section 146 of the Act of

2003 provides that whoever, fails to comply with any order or

direction given under the Act, within such time as may be

specified or contravenes or attempts or abets the

contravention of any of the provisions of the Act or any rules

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or Regulations made thereunder, is liable for punishment with

rigorous imprisonment for a term which may extend to three

months or with fine which may extend to one lakh rupees or

both. The word ‘whoever’ is of a very wide connotation. It

covers all persons and authorities. Under Section 94 the

Appropriate Commission is empowered to summon and

enforce the attendance of any person and requisition public

record. Therefore, it can summon and enforce the attendance

of even the officers of the Government. It can require the

production of any document including any public record from

the State. Under sub-section (2) of Section 94, it has power to

pass interim orders in any proceedings. Power to pass interim

orders is not restricted in as much as there is no embargo in

passing orders against Government or its functionaries.

Therefore, interim orders can even be passed against the

Government or its officials. Section 95 provides that all

proceedings before the Appropriate Commission shall be

deemed to be judicial proceedings within the meaning of

sections 193 and 228 of the Indian Penal Code and the

Appropriate Commission shall be deemed to be a civil court for

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the purposes of sections 345 and 346 of the Code of Criminal

Procedure, 1973.

66. There is nothing in Sections 61 & 62 of the Act of 2003 to

show that orders relating to tariff will not bind the State

Government. The State is not above law and it is bound to

respect the mandate of the legislature. Otherwise tariff

determination will not be in consonance with the various

factors and parameters specified in Section 61. The

Commission is an independent statutory body and its

directions being in terms of the Act are definitely binding on

the Board whose dejure owner is the State. The ultimate end

effect shall be on dejure owner viz. the State of Punjab.

67. Therefore, we are of the considered view that the

Commission is not helpless in dealing with the RSD cost and

loans and interest thereon which are reflected in the Balance

sheet of the Board and such costs cannot as a matter of

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course be passed on to the consumers without considering the

reasonableness of such costs and the interests of the

consumers. It has to be considered by the Commission

whether a particular expenditure is properly incurred or not.

In the case of West Bengal Electricity Regulatory Commission

vs. CESC Ltd. supra (pages 761-762), it was held that the

Commission is bound to examine the accounts of the utility

even though they may be genuine and are not challenged.

According to the Supreme Court, the accounts of the utility

are not ipso-facto binding on the Commission as the

Commission is required to consider the factors and

parameters for determination of tariff. In this regard, the

Supreme Court held as follows:

“ We notice that for the purpose of the !948 Act, clause XVII of Schedule VI defines the various types of expenditures enumerated therein, as expenditure “properly incurred” therefore for the purpose of 1948 Act it would have been sufficient for a licensee to bring his expenditure under that definition clause and the same was entitled to be counted for the purpose of determining the tariff under the said Act. But we have noticed hereinabove that though the principles of Schedule VI have been adopted by the Commission in its Regulations the same will have to be considered along with other principles enumerated in the Regulations which includes the principles encompassed in clauses (b) to (g) of Section

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29(2) of the 1998 Act. We have also held that in the event of there being any conflict, it is the provisions of the 1998 Act which would prevail. The 1998 Act mandates the Commission to take into consideration the efficient management by the licensee of its Company, as also the interest of consumers while determining the tariff, therefore, if these two factors which go in favour of the consumers are in conflict with the definition of expenditure “properly incurred” in Schedule VI to the 1948 Act then it is for the Commission to reconcile this conflict and decide whether to accept the expenditure reflected in the accounts of the Company or not. In this process the Commission in our opinion is not bound by the auditors’ report. Herein we notice that the objects of the 1948 Act are entirely different from the objects of the 1998 Act. The 1948 Act under Schedule VI does not contemplate taking into account factors like good performance of the Company as also the consumers’ interests in its expenditure while considering a particular expenditure as “properly incurred expenditure”. While the 1998 Act specifically mandates that these factors also should be taken into account while considering whether a particular expenditure is “properly incurred expenditure” or not, therefore, it is not correct to say that each and every expenditure maintained under the provisions of the Sixth Schedule ipso facto becomes binding on the Commission. The High Court further came to the conclusion that in view of the fact that there is no challenge to the accounts of the Company by the consumers, the said accounts of the Company should be accepted by the Court. Here again we are not in complete agreement with the High Court. There may be any number of instances where an account may be genuine and may not be questioned, yet the same may not reflect good performance of the company or may not be in the interest of the consumers. Therefore, there is an obligation on the Commission to examine the accounts of the Company, which may be genuine and unchallenged on

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that count still in the light of the above requirement of Sections 29(2)(g) to (h). In the said view of the matter admitting that there is no challenge to the genuineness of the accounts, we think on this score also the accounts of the Company are not ipso facto binding on the Commission. However, we hasten to add that the Commission is bound to give due weightage to such accounts and should not be differ from the same unless for good reasons permissible in the 1998 Act”

68. The learned counsel for the Board and the State

submitted that it is not the function of the Commission to go

into the questions of RSD costs, loans/ liabilities of the Board

forgetting that these are matters relating to capital investment

and over burden on the finances of Board. He referred to

Section 61 of the Act of 2003 to submit that the Commission

does not have any power to frame Regulations in regard to

such matters. As a sequitur, it was argued that in case the

Commission does not have the power to frame Regulations on

the aforesaid subject, the Commission also will not have the

power to go into the question of apportionment of the cost of

the RSD project between the Board and the Irrigation

Department, or with regard to the question of procurement of

loans and incurring of liabilities by the Board or with respect

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to the purchase of power. According to the learned counsel for

the Board it is well settled that even if any order or direction

issued by the Commission was based on the Regulations, it

can not be enforced, if it related to factors outside its domain.

It was further argued that where a Regulation is inconsistent

with the Act, it must be ignored and direction or order based

on such a Regulations is not enforceable. In order to support

the plea, the learned counsel relied on the decision of the

Supreme Court in Bharathidasan University & Anr. Vs. CTE &

Ors. (2001) 8 SCC 676, wherein it was held that where the

power to make Regulations is circumscribed by specific

limitations and engrafted therein, Regulations which are not

within the specified limits must be ignored.

69. The learned counsel also invited our attention to Section

22(2) of the Act of 1998, particularly sub-clauses (a), (c), (e)

and (m) thereof. The learned counsel submitted that wide and

extended powers were bestowed on the State Government to

confer functions upon the State commissions relating to

matters which were specified in various sub clauses including

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(a), (c), (e) & (m) of sub-section (2) of Section 22 of the Act of

1998, to regulate the investment approval for generation,

transmission, distribution and supply of electricity to the

entities operating in the State; to regulate the operation of the

power system within the State, to regulate the working of the

licensees and other persons authorised or permitted to engage

in the electricity industry in the State and to promote their

working in an efficient, economical and equitable manner; to

regulate the assets, properties and interest in properties

concerning or related to the electricity industry in the State

including the conditions governing entry into, and exit from,

the electricity industry in such manner as to safeguard the

public interest.

70. The learned counsel for the Board also pointed out that

the Punjab Electricity Regulatory Commission, even before

coming into force of the Act of 2003, was not conferred with

any of the aforesaid functions by the State Government and

thus, even when the Act of 1998 was in vogue, it did not have

the power to deal with matters of investment for generation,

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transmission, distribution and supply of electricity or with

regard to the matters concerning assets and properties and

interests in properties concerned or related to the electricity

industry in the State. Learned counsel also submitted that

neither under Section 61 of the Act of 2003 nor under Section

86 thereof, which basically deal with the functions of the State

commissions, any power has been vested in the Commission

to deal with the matters of loans/ liabilities, investments for

generation transmission, distribution and supply of electricity

etc.

71. The upshot of the submissions of the learned counsel for

the Board and Government is that RSD cost and the question

of loans and liabilities are beyond the domain of the

commission. It is strange that the aforesaid pleas have even

come from the Board. It leaves no manner of doubt in our

minds that the Board and the Government are inseparable.

72. We do not agree with the submissions of the learned

counsel that the questions relating to the RSD cost and

loans/liabilities of the Commission are outside the jurisdiction

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of the Commission. In order to deal with the submissions of

the Board, we will have to again refer to Section 61(d) of the

Act of 2003 and have to reiterate that the Commission u/s 61

(d) of the Act of 2003, while determining tariff, is required to

safeguard the consumers’ interest and permit recovery of cost

of electricity in a reasonable manner. We may again note that

the determination of tariff in the instant case depends upon

various factors including the RSD cost and the interest

payable on the loans and liabilities. RSD cost and loan and

liabilities affect the tariff and the revenue requirement of the

Board. They have to be taken into consideration for fixation of

tariff. The issue of RSD cost and loan and liabilities are in

reality issues concerning tariff and not merely issue of

investment etc.

73. According to Section 61(a) of the Act of 2003 the

Commission for determination of tariff is also to be guided by

the principles and methodologies specified by the Central

Electricity Regulatory Commission for determination of tariff

applicable to generating companies and transmission

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licensees. Regulation 4(2) of the Central Electricity Regulatory

Commission (Terms & Conditions of Tariff), 2003 framed by

the CERC lays down the terms for determination of tariff of

hydro electric power generating system. Regulation 4(2) of

CERC Regulations to the extent relevant reads as follows:-

“ In relation to multi purpose hydro electric projects with irrigation, flood control and power components, the capital cost chargeable to the power component of the project only shall be considered for determination of tariff”.

74. Thus the cost of power component of RSD project can be

taken into consideration for determination of tariff. Therefore,

what is the cost of the power component of the RSD project

has to be decided by the Commission being a tariff issue.

75. The learned counsel for the Board was not right in urging

that the Commission has no jurisdiction to frame Regulations

in regard to the factors relating to determination of the cost of

RSD project or the cost of the power component of the project.

Again under Section 86(1)(a) it is the function of the

Commission to determine tariff. Thus all issues relating to or

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having impact on tariff fall within the purview∗∗ of the

Commission. Just because provisions of Section 22(2) of the

Act, 1998 have not been completely incorporated in Section 86

of the Act, is no ground to hold that issues relating to cost of

RSD project, wrongly loaded on the Board, and the questions

relating to RE subsidies and loans etc. cannot be gone into by

the Commission. A contrary view overlooks the wide power of

the Commission to deal with all aspects and issues relating to

tariff and ARR and their determination.

76. In view of the aforesaid analysis, we hold and direct

that:-

(i) Commission is not powerless to issue orders and

directions relating to matters having a bearing on and

nexus with the determination and fixation of tariff and its

directions shall be binding on all persons and authorities

including the State Government in this case.

∗∗ Corrected as per the Order dated 25th July 2006

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(ii) The accounts of the Board which reflect the cost of

the RSD project allocated to the Board are** not binding

on the Commission even though the allocation may have

been done by the State of Punjab as the allocation is a

tariff issue.

(iii) The allocation of 79.1% of the cost of Ranjit Sagar

Dam to the Board is arbitrary and a clear anomaly

resulting in undue burden on the Board. Since such

fastening of liability is a continuous wrong and affects

the tariff, the Commission shall determine the cost of the

project by due diligence and fair study of the cost which

is to be allocated to the Board.

iv) It will be open to the Commission to secure the

assistance of experts for determining the cost which is

to be allocated to the Board in accordance with law;

v) The Board and the State of Punjab shall file all the

relevant documents before the Commission for

determining the cost chargeable to the power component

** Corrected as per the Order dated 25th July 2006

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of the project and if there is a non compliance, it is open

to the Board to draw adverse inference as well.

vi) In case the Commission allocates a reduced cost of

the RSD project to the Board, consequential effect shall

be given to it by the State of Punjab. It shall also be

entitled to all consequential reliefs;

vii) The Commission shall complete its determination

within six months from the date of communication of this

judgement;

viii) Since the determination will take place in future,

the relief, subject to the outcome of the Commission’s

determination regarding allocation of cost of RSD Project

to the Board, shall be made available to the consumers

after the truing up exercise for the year 2006-07 and the

outcome of the truing up exercise shall be given effect to;

ix) Such relief shall be available to all the consumers

and shall not be confined to the industrial consumers

alone who have filed appeals before us.

C. Issue relating to retrospective operation of tariff order for the year 2005-06

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77. Some of the Industrial Consumers have questioned

determination of tariff by the Commission on the ground that

the effect of the Tariff Order for the year 2005-06 was given

from April 1, 2005 while the order was passed on June 14,

2005. According to them the Commission was not having any

jurisdiction to require the consumers to pay enhanced tariff

from a retrospective date.

78. In order to determine the reasons which led to the

passing of the tariff order on June 14, 2005 instead of it being

passed on March 31, 2005, it is necessary to refer to a few

dates. The Board filed ARR and tariff application on December

30, 2004. The application, however, was found to be

incomplete. The Commission by its communication dated

January 21, 2005 asked the Board to remove the deficiencies

and complete the application. It was, however, only on Feb.,

9, 2005 that the deficiencies were removed and the application

was taken on record. This led to delay in the determination of

tariff for the year 2005-06. The Commission was able to pass

the tariff order only on June 14, 2005, though the financial

year commenced on April 1, 2005.

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79. It is not in dispute that the Commission determined the

tariff for the year 2005-06. The Industrial Consumers would

not have been able to grudge the application of the tariff order

with effect from April 1, 2005, in case the tariff order was

passed on that date or on a date close to that date. It is only

because the tariff order was delayed by about two months that

the Industrial Consumers are finding fault with its application

from April 1, 2005.

80. It needs to be noticed that the retrospective operation

covers only a period of two months and having regard to the

short time involved, the Commission was of the view that the

interest of the consumers will not be adversely affected by the

retrospective operation of the tariff order.

81. We do not find that the Commission was wrong in its

approach by giving effect to the tariff order from the aforesaid

retrospective date as the tariff was fixed for the tariff year

2005-06, which commenced on 1st April, 2005. If the

submission of the Industrial Consumers is accepted, a

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consumer could initiate some proceedings in a Court against

the Commission with a prayer for seeking an interim order

restraining the Commission from revising the tariff on some

ground or the other. This could delay the passing of the tariff

order in case an interim order interdicting the determination of

tariff is passed pending the proceedings. In such a

contingency, it is only after the interim order is lifted by the

Court that the Commission would be in a position to pass the

tariff order. Obviously, it would only be just and fair that the

tariff order relates back to and commences on the first day of

the year for which the tariff determination is made. In Kanoria

Chemicals & Industries Ltd. & Anr. Vs. State of U.P. & Ors.

(1992) 2 SCC 124, a question was raised with regard to the

competence of the Electricity Board to determine tariff with

retrospective effect. The Supreme Court was of the view that

retrospective effect to the revision of tariff was clearly

envisaged in law. In this regard, the Supreme Court held as

follows:

“ A retrospective effect to the revision also seems to be clearly envisaged by the section. One can easily conceive a weighty reason for saying so. If the section were

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interpreted as conferring a power of revision only prospectively, a consumer affected can easily frustrate the effect of the provision by initiating proceedings seeking an injunction restraining the Board and State from revising the rates, on one ground or other, and thus getting the revision deferred indefinitely. Or, again, the revision of rates, even if effected promptly by the Board and State, may prove infructuous for one reason or another. Indeed, even in the present case, the Board and State were fairly prompt in taking steps. Even in January 1984, they warned the appellant that they were proposing to revise the rates and they did this too as early as in 1985. For reasons for which they cannot be blamed this proved ineffective. They revised the rates again in March 1988 and August 1991 and, till today, the validity of their action is under challenge. In this State of affairs, it would be a very impractical interpretation of the section to say that the revision of rates can only be prospective”.

82. Section 62, which provides for determination of tariff by

the Commission, does not suggest that the tariff cannot be

determined with retrospective effect. In the instant case, the

whole exercise was undertaken by the PSERC to determine

tariff and the annual revenue requirement of the PSERB for

the period April, 1, 2005 to March 31, 2006, therefore,

logically tariff should be applicable from April 1, 2005.

83. According to sub-section (6) of Section 64 of the Act of

2003, a tariff order unless amended or revoked continues to be

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in force for such period as may be specified in the tariff order.

Thus the Commission is vested with the power to specify the

period for which the tariff order will remain in force. The

Commission deriving its power from Section 64(6) has

specified that the order shall come into force from April 1,

2005. No fault can be found with such a retrospective

specification of the Commission.

84. The learned counsel for the industrial consumers relied

on the decision of the Supreme Court in Sri Vijay Lakshmi

Rice Mills vs. State of Andhra Pradesh, AIR 1976 SC 1471,

wherein it was held that a notification takes effect from the

date it is issued and not from a prior date unless otherwise

provided by the statute, expressly or by appropriate language

from which its retrospective operation could be inferred. This

decision is of no avail to the industrial consumers, in view of

the provisions of Section 64 (6) of the Act of 2003, which

empowers the Commission to specify the period for which the

tariff order will remain in force. In other words, the

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Commission is empowered to specify the date on which the

tariff order will commence and the date on which it will expire.

85. The Board in consonance with the cost plus regime is

entitled to recover all costs prudently incurred for providing

service to the consumers. Besides, the Board is entitled to

reasonable return. Since the cost prudently incurred has to

be recovered, therefore, in the event of the tariff order being

delayed, it can be made effective from the date tariff year

commences or by annualisation of the tariff so that deficit, if

any, is made good in the remaining part of the year or it could

be recovered after truing up exercise by loading it in the tariff

of the next year. All these options are available with the

Commission.

86. There is one more aspect which needs to be considered.

In case the Commission had lowered the tariff rates, relief to

the consumers could not be denied on the ground that the

tariff order is being operated retrospectively.

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87. For all these reasons we hold that the Commission had

the jurisdiction to pass the tariff order with retrospective

effect. Therefore, we reject the submission of the learned

counsel for the industrial consumers that the tariff cannot be

fixed from a retrospective date.

D. Re Cost of Supply and Cross Subsidy


submitted that the tariff is to be based on the cost of supply of

electricity to each category of consumers, having regard to the

voltage at which power supply is made available. Some of the

learned counsel for the appellants submitted that no

consumer category should be asked to pay for consumption of

electricity by another category of consumers. In other words,

there should be no cross subsidies amongst the different

consumer categories. In any event, according to the learned

counsel, cross subsidies need to be reduced and ultimately

eliminated. The learned counsel canvassed that the tariff

order for the year 2005-06 is contrary to the provisions of

Section 61 (d) and (g). They pointed out that according to

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Section 61 (d) and (g), the Commission is to be guided, while

fixing tariff, by the principle that the interest of the consumers

is required to be safeguarded, and at the same time, recovery

of the cost of electricity has to be made in a reasonable

manner. Furthermore, the tariff is to be fixed in such a

manner that it progressively reflects the cost of supply of

electricity and also reduces and eliminates cross subsidies

within the period to be specified by the appropriate

Commission. The learned counsel on behalf of the appellants

also argued that the Commission ought to have applied the

concept of cost of supply to determine the question whether

cross subsidy has increased or decreased. It was further

contended that the Commission by disregarding the concept of

cost of supply acted contrary to the provisions of Section 61(g)

of the Act of 2003.

89. The learned counsel for the Industrial Consumers further

submitted that cross subsidy component in the impugned

tariff order for the year 2005-06, has gone up, which violates

the express provisions of the statute requiring the Commission

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to ensure that the current level of cross subsidy is reduced

and eliminated.

90. The learned counsel appearing for the Board and the

Commission submitted that the Commission has reduced the

cross subsidy level for the tariff year 2004-05, as against the

previous years, by increasing the tariff for the domestic

consumer and by requiring the agricultural consumer to pay

Rs. 2/- per unit, which represents over 60% of the cost of

supply. It is pointed out that before the tariff determination

for the year 2004-05, no tariff was payable by the agricultural

consumers. According to the learned counsel for the Board

and the Commission, Section 61 (g) of the Electricity Act,

2003, must be applied in an objective and rational manner.

What is required to be ensured is that the Commission

proceeds in the direction of a tariff regime, which has the effect

of reducing the cross subsidy progressively, which means,

progressing by degrees. It does not mean that the cross

subsidies have to be done away with suddenly by providing a

tariff shock to the consumers. It will be in consonance with

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the provisions of Section 61 (g), if the reduction in cross

subsidy is looked at with reference to the rate of electricity per

unit, and not with reference to the quantum of cross subsidy

collected, which depends upon variable factors. In case, the

consumption by HT consumers is more, the cross subsidy will

go up. In the event the consumption of electricity by

agricultural consumers increases, the cross subsidy will still

go up. But when HT and agricultural consumption goes down,

collection of cross subsidy will decrease. Therefore, it was

submitted that the question whether the cross subsidy has

increased or decreased should not be considered, on the basis

of quantum of consumption of electricity.

91. We have considered the submissions of the learned

counsel for the parties. The National Electricity Policy

recognizes that electricity is an essential requirement for all

facets of life and it is a basic human need. The National

Electricity Policy also points out that it is a critical

infrastructure on which the socio economic development of the

country depends. An estimated investment of the order of Rs.

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90,000 crores at 2002-03 price level would be required to

finance generation, transmission, sub-transmission,

distribution and rural electrification projects. For the

investment of this scale to take place, the Act has ensured

reasonable return to the generating companies and licensees.

It has also been ensured that they are not saddled with the

cost of subsidies. This is done to instil confidence in investors

and entrepreneurs that they will be able to secure reasonable

return on their investments in the electricity sector. Such

confidence building measures are necessary as the country

requires the unleashing of the economic development.

Tremendous growth in generation, transmission and

distribution of electricity is needed. Electricity is the axis on

which economic development of the country rolls∗∗.

92. While keeping in view, this perspective, the poor of the

country cannot be forgotten. Poorer sections of society have to

be pulled up from life of deprivation and they shall not be

denied access to electricity on the ground that they cannot

∗∗ Corrected as per the Order dated 25th July 2006

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afford the same. For some time in our democratic set up,

some sections need socio-economic support and the support

wholly and solely cannot come from the Government alone in

the form of subsidy. The well to do sections of the society

need to contribute for making electricity available to the poor

and certain other weak sectors. This can be achieved either by

the method of cross subsidization or by imposition of

electricity duty by the State. But at the same time this does

not mean that cross subsidies or the electricity duty should be

allowed to cast unbearable burden on the consumers and the

people. High level cross subsidies lead to injustice and create

problems of their own. It is also a fact that categories which

are cross subsidized, by fixing above cost tariffs for

commercial and industrial consumers have a tendency to over

consume. This is marked in respect of agricultural category.

Because of the free or almost free electricity available to

farmers, there has been depletion of sub-soil water as the

same is being overdrawn and exploited. In the interests of the

society a mechanism needs to be developed where cross

subsidies and subsidies do not stimulate over consumption of

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electricity by the beneficiaries of the largesse and the cross

subsidies do not become too burdensome for the subsidizing

consumers. Such a situation also cannot be allowed to

develop where cost of electricity cannot be recovered in a

reasonable manner and the tariff is not brought progressively

to the level of cost of supply of electricity.

93. The aforesaid ratiocination is based on the various

provisions of the Act of 2003, particularly, its Preamble and

Sections 39, 42, 61(d), 61(g) and 65 and National Electricity

Policy and National Tariff Policy. These provisions are relevant

for examining the submissions of the learned counsel for the

parties. It will, therefore, be useful to set out the Preamble of

the Act of 2003, Sections 39, 42, 61(d) & (g) and Section 65

thereof, National Electricity Policy and National Tariff Policy

notified by the Central Government on February 12, 2005 and

January 06, 2006 respectively, to the extent these are relevant

to the matters relating to cost of supply, cross subsidy and

subsidy. The preamble and the aforesaid provisions read

thus:

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“PREAMBLE TO THE ELECTRICITY ACT, 2003 [No. 36 OF 2003]

“An Act to consolidate the laws relating to generation,

transmission, distribution, trading and use of electricity and generally for taking measures conducive to development of electricity industry, promoting competition therein, protecting interest of consumers and supply of electricity to all areas, rationalisation of electricity tariff, ensuring transparent policies regarding subsidies, promotion of efficient and environmentally benign policies constitution of Central Electricity Authority, Regulatory Commissions and establishment of Appellate Tribunal and for matters connected therewith or incidental thereto.”

Section 39 :

“39. State Transmission Utility and Functions:-(1) The State Government may notify the Board or a Government company as the State Transmission Utility:

Provided that the State Transmission Utility shall not engage in the business of trading in electricity:

Provided further that the State Government may transfer, and vest any property, interest in property, rights and liabilities connected with, and personnel involved in transmission of electricity, of such State Transmission Utility, to a company or companies to be incorporated under the Companies Act, 1956 (1 of 1956) to function as transmission licensee through a transfer scheme to be effected in the manner specified under part XIII and such company or companies shall be deemed to be transmission licensees under this Act.

(2) The functions of the State Transmission Utility shall be - (a) to undertake …….

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(d) to provide non-discriminatory open access to its transmission system for use by-

(i) any licensee or generating company on payment of

the transmission charges ; or

(ii) any consumer as and when such open access is provided by the State Commission under sub-section (2) of section 42, on payment of the transmission charges and a surcharge thereon, as may be specified by the State Commission:

Provided that such surcharge shall be utilised for the purpose of meeting the requirement of current level cross-subsidy:

Provided further that such surcharge and cross subsidies shall be progressively reduced and eliminated in the manner as may be specified by the State Commission:

Provided also that such surcharge may be levied till such time the cross subsidies are not eliminated:

Provided also that the manner of payment and utilisation of the surcharge shall be specified by the State Commission.

Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.

Section 42:

42. Duties of distribution licensees and open access:- (1) ……….

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(2) The State Commission shall introduce open access in such phases and subject to such conditions, (including the cross subsidies, and other operational constraints) as may be specified within one year of the appointed date by it and in specifying the extent of open access in successive phases and in determining the charges for wheeling, it shall have due regard to all relevant factors including such cross subsidies, and other operational constraints:

Provided that such open access may be allowed before the cross subsidies are eliminated, on payment of a surcharge in addition to the charges for wheeling as may be determined by the State Commission:

Provided further that such surcharge shall be utilised to meet the requirements of current level of cross subsidy within the area of supply of the distribution licensee:

Provided also that such surcharge and cross subsidies shall be progressively reduced and eliminated in the manner as may be specified by the State Commission:

Provided also that such surcharge shall not be leviable in case open access is provided to a person who has established a captive generating plant for carrying the electricity to the destination of his own use.

…………….. …………….. (4) Where the State Commission permits a consumer or class of consumers to receive supply of electricity from a person other than the distribution licensee of his area of supply, such consumer shall be liable to pay an additional surcharge on the charges of wheeling, as may be specified by the State Commission, to meet the fixed cost of such distribution licensee arising out of his obligation to supply.

Section 61(d):

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61. Tariff Regulations.

The Appropriate Commission shall, subject to the provisions of this Act, specify the terms and conditions for the determination of tariff, and in doing so, shall be guided by the following, namely:-

a. …….

d. safeguarding of consumers' interest and at the same time, recovery of the cost of electricity in a reasonable manner;

Section 61(g)

g. that the tariff progressively reflects the cost of supply of electricity, and also, reduces and eliminates cross-subsidies within the period to be specified by the Appropriate Commission”;

……………

Section 65:

65. Provision of subsidy by State Government.

“If the State Government requires the grant of any subsidy to any consumer or class of consumers in the tariff determined by the State Commission under section 62, the State Government shall, notwithstanding any direction which may be given under section 108, pay, in advance and in such manner as may be specified, the amount to compensate the person affected by the grant of subsidy in the manner the State Commission may direct, as a condition for the licence or any other person concerned to implement the subsidy provided for by the State Government:

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Provided that no such direction of the State Government shall be operative if the payment is not made in accordance with the provisions contained in this section and the tariff fixed by State Commission shall be applicable from the date of issue of orders by the Commission in this regard.”

E. National Electricity Policy:

5.5 RECOVERY OF COST OF SERVICES & TARGETTED SUBSIDIES: 5.5.1 There is an urgent need for ensuring recovery of cost of service from consumers to make the power sector sustainable.

5.5.2 A minimum level of support may be required to make the electricity affordable for consumers of very poor category. Consumers below poverty line who consume below a specified level, say 30 units per month, may receive special support in terms of tariff which are cross-subsidized. Tariffs for such designated group of consumers will be at least 50 % of the average (overall) cost of supply. This provision will be further re-examined after five years.

5.5.3 Over the last few decades cross-subsidies have increased to unsustainable levels. Cross-subsidies hide inefficiencies and losses in operations. There is urgent need to correct this imbalance without giving tariff shock to consumers. The existing cross-subsidies for other categories of consumers would need to be reduced progressively and gradually.

5.5.4 The State Governments may give advance subsidy to the extent they consider appropriate in terms of section 65 of the Act in which case necessary budget provision would be required to be made in advance so that the utility does not suffer financial problems that may affect its operations. Efforts would be made to ensure that the subsidies reach the targeted beneficiaries in the most transparent and efficient way.

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F. National Tariff Policy:

“8.3 Tariff design : Linkage of tariffs to cost of service It has been widely recognised that rational and economic pricing of electricity can be one of the major tools for energy conservation and sustainable use of ground water resources. In terms of the Section 61 (g) of the Act, the Appropriate Commission shall be guided by the objective that the tariff progressively reflects the efficient and prudent cost of supply of electricity. The State Governments can give subsidy to the extent they consider appropriate as per the provisions of section 65 of the Act. Direct subsidy is a better way to support the poorer categories of consumers than the mechanism of cross-subsidizing the tariff across the Board. Subsidies should be targeted effectively and in transparent manner. As a substitute of cross-subsidies, the State Government has the option of raising resources through mechanism of electricity duty and giving direct subsidies to only needy consumers. This is a better way of targetting subsidies effectively.

Accordingly, the following principles would be adopted: 1. In accordance with the National Electricity Policy, consumers below poverty line who consume below a specified level, say 30 units per month, may receive a special support through cross subsidy. Tariffs for such designated group of consumers will be at least 50% of the average cost of supply. This provision will be re-examined after five years.

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2. For achieving the objective that the tariff progressively reflects the cost of supply of electricity, the SERC would notify roadmap within six months with a target that latest by the end of year 2010-2011 tariffs are within ± 20 % of the average cost of supply. The road map would also have intermediate milestones, based on the approach of a gradual reduction in cross subsidy. For example if the average cost of service is Rs 3 per unit, at the end of year 2010-2011 the tariff for the cross subsidised categories excluding those referred to in para 1 above should not be lower than Rs 2.40 per unit and that for any of the cross-subsidising categories should not go beyond Rs 3.60 per unit. 3. While fixing tariff for agricultural use, the imperatives of the need of using ground water resources in a sustainable manner would also need to be kept in mind in addition to the average cost of supply. Tariff for agricultural use may be set at different levels for different parts of a State depending of the condition of the ground water table to prevent excessive depletion of ground water. Section 62 (3) of the Act provides that geographical position of any area could be one of the criteria for tariff differentiation. A higher level of subsidy could be considered to support poorer farmers of the region where adverse ground water table condition requires larger quantity of electricity for irrigation purposes subject to suitable restrictions to ensure maintenance of ground water levels and sustainable ground water usage.

4. Extent of subsidy for different categories of consumers can be decided by the State Government keeping in view various relevant aspects. But provision of free electricity is not desirable as it encourages wasteful consumption of

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electricity besides, in most cases, lowering of water table in turn creating avoidable problem of water shortage for irrigation and drinking water for later generations. It is also likely to lead to rapid rise in demand of electricity putting severe strain on the distribution network thus adversely affecting the quality of supply of power. Therefore, it is necessary that reasonable level of user charges are levied. The subsidized rates of electricity should be permitted only up to a pre-identified level of consumption beyond which tariffs reflecting efficient cost of service should be charged from consumers. If the State Government wants to reimburse even part of this cost of electricity to poor category of consumers the amount can be paid in cash or any other suitable way. Use of prepaid meters can also facilitate this transfer of subsidy to such consumers.

5. Metering of supply to agricultural / rural consumers can be achieved in a consumer friendly way and in effective manner by management of local distribution in rural areas through commercial arrangement with franchisees with involvement of panchayat institutions, user associations, cooperative societies etc. Use of self closing load limitors may be encouraged as a cost effective option for metering in cases of “limited use consumers” who are eligible for subsidized electricity”.

94. Having set out the aforesaid relevant provisions of the Act

and the Policies, we will now deal with the various

submissions advanced by the learned counsel for the

industrial consumers regarding cross subsidy, subsidy and

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cost of supply and the views** expressed at the threshold by

us.

95. It was submitted by the learned counsel for the Industrial

Consumers that cross subsidies cannot be permitted to exist

between the different consumer categories as per the

provisions of the Act of 2003. Reliance was placed by the

learned counsel on the decision of the Supreme Court in West

Bengal Electricity Regulatory Commission Vs CESC Ltd etc.,

JT (2002) 7 SC 578. It was pointed out that the Supreme

Court had set aside the order of the Calcutta High Court,

whereby the High Court had directed continuance of cross

subsidy, contrary to the view of the West Bengal Electricity

Regulatory Commission. The learned counsel contended that

on the basis of the Supreme Court decision cross subsidies

need to be rooted out from the system and in case the

Government chooses to subsidize the supply of energy to any

particular class of consumers, the same can be done provided

the burden or loss suffered by the generator or the


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transmission licensee is borne by the State government and

not imposed on any class of consumers.

96. We have given our deep consideration to the submission

of the learned counsel for the Industrial Consumers, but we

express our inability to accept the same. The provisions of the

Act of 2003 and the aforesaid policies of the Government have

enabled the Regulatory Commission to continue with the cross

subsidies for the present. This is borne out by an analysis of

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the following provisions of the Act and the aforesaid policies

and their analysis:-

i. Preamble to the Act of 2003, inter-alia, speaks of

rationalization of subsidies. Rationalisation of subsidies

presupposes existence of subsidies in the system and

their continuance;

ii. According to Section 61(g), an appropriate commission,

while framing Regulations for specifying the terms and

conditions for determination of tariff is to be guided by

the objective that the tariff progressively reflects the cost

of supply of electricity, and also reduces and eliminates

cross subsidies within a period to be specified by the

appropriate commission. Thus, the legislation while

taking notice of the existence of cross subsidies in the

system, requires cross subsidies to be reduced gradually,

step by step and not abruptly or suddenly.

iii. Para 5.5.3 of the National Electricity Policy recognizes the

fact that cross subsidies have increased to unsustainable

levels and there is urgent need to correct the imbalance.

The National Tariff Policy proceeds on the basis that

cross subsidies are to be brought down but not abruptly

to prevent tariff shock to the consumers. Thus the policy

permits continuation of cross subsidies in the system for

some time but at the same time it requires imbalance

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created by high level of subsidies in the system, to be

corrected.

iv. Section 39(2) while laying down the functions of a State

transmission utility, inter-alia, requires the State utility

to provide non discriminatory open access to its

transmission system for use by any licensee or

generating company on payment of the transmission

charges or any consumer as and when such open access

is provided by the State Commission under Sub section

(2) of Section 42, on payment of the transmission charges

and a surcharge thereon as may be specified by the State

Commission, provided that such surcharge shall be

utilized for the purpose of meeting the requirements of

current level of cross subsidy : provided further that

such surcharge and cross subsidies shall be

progressively reduced and eliminated in the manner as

may be specified by the State commission: provided also

that such surcharge may be levied till such time the

cross subsidy is not eliminated.

v) Section 42(2) provides that the State Commission shall

introduce open access in such phases and subject to

such conditions, as may be specified within one year of

the appointed date by it and in specifying the extent of

open access in successive phases and in determining the

charges for wheeling, it shall have due regard to all

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relevant factors including such cross subsidies, and

other operational constraints:

vi) Such open access may be allowed before the cross

subsidies are eliminated on payment of a surcharge in

addition to the charges for wheeling as may be

determined by the State Commission :

vii) Further such surcharge shall be utilised to meet the

requirements of current level of cross subsidy within the

area of supply of the distribution licensee:

viii) Also such surcharge and cross subsidies shall be

progressively reduced and eliminated in the manner as

may be specified by the State Commission:

ix) Sections 39 and 42 of the Act of 2003 reveal that the

Parliament was conscious of the presence of cross

subsidies between the different categories or class of

consumers but they have not been rooted out. Rather,

the Commissions has been left free to continue with them

for the time being, but with the rider that they shall be

reduced and eliminated progressively.

97. Reliance placed by the learned counsel for the Industrial

Consumers on the decision of the Supreme Court in West

Bengal case (supra) for contending that cross subsidies cannot

be continued, is of no avail as the provisions are distinct and

different. In that case, it was noticed by the Supreme Court

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that the object of the Act of 1998 was to prevent

discrimination in fixation of tariff by imposing cross subsidy.

The Supreme Court decided the question of cross subsidy in

the context of Sections 29(2)(d), 29(3) and 29(5) of the 1998

Act. At this stage, it would be necessary to examine these

provisions. Section 29(2) (d) of the Act of 1998 provides that

the State Commission while determining by Regulations the

terms and conditions for the fixation of tariff, shall be guided

by the factors which would encourage efficiency, economical

use of the resources, good performance, optimum investments

and other matters which the State Commission considers

appropriate for the purpose of the Act. Section 29(3)

enunciates that the State Commission, while determining the

tariff, shall not show undue preference to any consumer of

electricity, but may differentiate according to the consumer’s

load factor, power factor, total consumption of energy during

any specified period or the time at which the supply is

required or the geographical position of any area, the nature of

supply and the purpose for which the supply is required.

Section 29(5) of the Act of 1998 postulates that in the event

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the State Government requires grant of any subsidy to any

consumer or class of consumers in the tariff to be determined

by the State Commission, the State Government shall pay the

amount by the grant of subsidy in the manner the State

Commission may direct.

98. In the aforesaid provisions of the Act of 1998, there is no

mention of cross-subsidy. The absence of any provision

relating to cross subsidy is significantly different from the Act

of 2003.

99. In so far as the Act of 2003 is concerned, as already

pointed out, it permits the regulatory Commission to provide

for cross subsidies between different class and categories of

consumers. Therefore, the decision of the Supreme Court in

West Bengal Case (supra) is of no assistance to the Industrial

Consumers.

100. The arguments advanced on behalf of the Industrial

Consumers that the appropriate Commission cannot resort to

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system of cross subsidy has no force, and the same is hereby

rejected.

101. It was also contended by the learned counsel for the

industrial consumers that the cross subsidies instead of being

reduced have increased by fixation of tariff by the Commission

for the year 2005-06.

102. In this regard, they drew our attention to Table Nos.

7.44, 9.5 and 9.6 of the Tariff order for the year, 2005-06.

The learned counsel submitted that the burden of cross

subsidies on the industrial consumers have increased more

than 10%, while the quantum of collection from the

agricultural and domestic consumers have not increased by

10%.

103. In response, the learned counsel for the Board and

the Commission submitted that there has been no increase in

the cross subsidies among consumer categories. It was

pointed out that there has been uniform increase in the tariff

for all categories by 10% and this being so, it was submitted

that there was no increase in the cross subsidies.

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104. The point for our consideration is whether cross

subsidy has increased or reduced has to be determined with

reference to the consumption of electricity by the subsidizing

and the subsidized consumers or is it to be worked out on the

basis of cost of supply of electricity per unit, to different

categories of consumers. In case the cross subsidy is to be

worked out on the basis of the consumption of electricity by

the subsidized and subsidizing consumers, the amount of

cross subsidy in that event would depend on the quantum of

sale of energy to various categories of consumers. By

employing this method, the quantum of cross subsidy will be

directly proportionate to the increase or decrease in the

consumption of electrical energy by various categories of

consumers. For example when the consumption of energy by

the industrial consumers goes down, the quantum of cross

subsidies will decrease. But when the industrial consumers

are consuming more, the cross subsidy will go up. Again,

when the sale of energy to the agricultural consumers goes up,

the quantum of cross subsidy will proportionately increase.

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Therefore, in case the quantum of cross subsidy is measured

on the basis of consumption, it will vary depending upon the

quantum of consumption by the consumers of various

categories. This is illustrated by figures given in the written

submissions filed on behalf of the appellants in Appeal No. 35

of 2005. If this method is adopted, the cross subsidies

between consumers may show inflated results even where the

tariff for the industrial & commercial consumers and railways

is reduced and tariff for the subsidized category is kept static

or is increased, since, the calculations will depend on the

consumption of electricity by the various categories. In the

instant case, there has been a uniform increase of tariff for all

categories by 10% but the quantum of cross subsidies

considered from the point of view of consumption may have

gone up. Basically, the distortions would disappear once the

cross subsidies are eliminated. But this still seems to be a far

cry in view of the recent Electricity (Amendment) Bill, 2005,

which has been tabled in the Parliament. Section 7 of the

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Amendment Bill seeks to substitute the following clause in

place of Section 61(g) of the principal Act:

(g) that the tariff progressively reflects the cost of supply of electricity, and also reduces cross subsidies in the manner specified by the Appropriate Commission,”

For the present, however, the law is that eventually the

cross subsidies are to be reduced and eliminated so that tariff

progressively reflects the cost of supply.

105. It appears to us that the question whether cross

subsidies have increased or decreased should be considered

with reference to the rate of supply of electricity per unit to

different categories of consumers and not on vagaries of

consumption, which are indefinite and cannot be controlled by

the Commission or the Board. In two years viz. 2004-05 and

2005-06; there has been a 6 paise/unit** increase in tariff for

the industrial consumers whereas there has been a 15

paise/unit** increase in tariff for the domestic consumers.

This being so it cannot be said that there has been an increase

in the cross subsidies.

** corrected as per order dated 25th July 2006

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106. It is significant to note that in the year 2004-05,

tariff for agricultural consumption was fixed at Rs. 2/- per

unit. It is equally important to note that earlier electricity was

being supplied to agriculturists free of cost. Therefore by

applying the aforesaid ** method, it can be safely Stated

that cross subsidy has been lowered during the year 2004-05

and was not increased during the year 2005-06. It may not be

proper to consider the question whether cross subsidy has

increased or decreased during the year 2005-06 by making a

comparison with the tariff for the year 2004-05 as the tariff for

the year, 2004-05 was reduced on the basis of an

assumption that the Board will generate a surplus of Rs.

438.29 crores. Subsequently, after the truing up exercise, it

was revealed that the Board has actually suffered a revenue

gap of Rs. 305.24 crores on account of reduction in tariff.

However, the Board had a surplus of Rs. 36.66 crores for the

financial year 2003-04. Therefore, the revenue gap for the

year 2004-05 was to the tune of Rs. 268.58 crores. This


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revenue gap had to be recovered during the year 2005-06 and

for that and other factors, the Commission in its wisdom

increased the tariff of all categories of consumers by 10%.

Therefore, cross subsidy for the year 2005-06 was not reduced

as compared to the year 2004-05.

107. The cross subsidies have to be brought down by

degrees without giving tariff shock to the consumers. Though

it is desirable that cross subsidies are reduced through every

tariff order but in a given situation, it may not be possible. As

long as cross subsidy is not increased and there is a roadmap

for its gradual reduction in consonance with Section 61(g) of

the Act of 2003 and the National Tariff Policy, the

determination of tariff by the Commission on account of

existence of cross subsidy in the tariff can not be flawed.


canvassed that the Commission is required to safeguard the

interests of the consumers by fixing a reasonable tariff, which

should reflect the cost of supply of electricity. There cannot be

any quarrel with the proposition that the ultimate aim is to go

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by the concept of cost plus basis of supply of electricity to

various categories and classes of consumers, but this cannot

be achieved immediately in one go. This can be accomplished

stage by stage over a period of time by reducing the cross

subsidies etc. In case, the cost of supply of electricity is

known the inefficiencies of the generator and the licensee

cannot be hidden. This will tend to bring transparency and

efficiency in the working of the utilities. It will also be

conducive to the recovery of the cost of electricity by utility in

a reasonable manner, giving boost to cost plus regime. We are

conscious of the fact that at present, data on cost of supply

has not been made available to the Commission. The data

must be supplied by the utilities to the Commission. The cost

of supply at different voltages is different. Therefore, data in

this regard must be acquired with reference to cost of supply

to the different class of consumers by calling upon the Board

to furnish the same.

109. According to Section 61(g) of the Act of 2003, the

Commission is required to specify the period within which

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cross subsidy would be reduced and eliminated so that the

tariff progressively reflects the cost of supply of electricity.

Under Section 28(2) of the Act of 1998, the Commission while

prescribing the terms and conditions of tariff was required to

safeguard the interests of the consumers and at the same

time, it was to ensure that the consumers paid for the use of

the electricity in a manner based on average cost of supply.

The word “Average” preceding the words “cost of supply” is

absent in Section 61(g) of the Act of 2003. The omission of the

word “Average” is significant. It indicates that the cost of

supply means the actual cost of supply, but it is not the intent

of the legislation that the Commission should determine the

tariff based on cost of supply from the date of the enforcement

of the Act of 2003. Section 61(g) of the Act of 2003 envisages a

gradual transition from the tariff loaded with cross subsidies

to a tariff reflective of cost of supply to various class and

categories of consumers**. Till the Commission progressively

reaches that stage, in the interregnum, the roadmap for

achieving the objective must be notified by the Commission ** Corrected as per the Order dated 25th July 2006

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within six months from January 6, 2006,** when the tariff

Policy was notified by the Government of India,** i.e. by July 6,

2006. In consonance with the tariff policy, by the end of the

year 2010-11, tariffs are required to be fixed within + 20% of

the average cost of supply (pooled cost of supply of energy

received from different sources). But the policy has reached

only up to average cost of supply. As per the Act, tariff must

be gradually fine tuned to the cost of supply of electricity and

the Commission should be able to reach the target within a

reasonable period of time to be specified by it. Therefore, for

the present, the approach adopted by the Commission in

determining the average cost of supply cannot be faulted. We,

however, hasten to add that we disapprove the view of the

Commission that the words “Cost of Supply” means “Average

Cost of Supply”. The Commission shall gradually move from

the principle of average cost of supply towards cost of supply.

** Corrected as per the Order dated 25th July 2006 ** Corrected as per the Order dated 25th July 2006

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110. Keeping in view the provisions of Section 61 (g),

which requires tariff to ultimately reflect the cost of supply of

electricity and the National Tariff Policy, which requires tariff

to be within + 20% of the average cost of supply, it seems to us

that the Commission must determine the cost of supply, as

that is the goal set by the Act. It should also determine the

average cost of supply. Once the figures are known, they

must be juxtaposed, with the actual tariff fixed by the

commission. This will transparently show the extent of cross

subsidy added to the tariff, which will be the difference

between the tariff per unit and the actual cost of supply.

111. In a given case, where an appropriate Commission

comes to the conclusion that time has come when tariff is to

be fixed without providing for cross subsidies between various

consumer categories, it can fix the tariff accordingly as there is

nothing in the Act which compels a regulatory Commission to

formulate tariff providing for cross subsidies between the

consumer categories for all times to come.

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112. The cross subsidized categories or for that matter

any category of consumers cannot be allowed to waste energy

or consume it extravagantly. The Commission must fix

reasonable level of consumption for categories up to which

they would be required to be cross-subsidized, but in case the

consumption rises beyond the prescribed limit, a higher tariff

which has no element of cross subsidy in it, needs to be fixed.

By this method the genuine needs of the consumers which are

being cross-subsidized would be met and at the same time

they will be prevented from indulging in over consumption of

electricity. This will lead to saving of energy and ground

water in the case of agricultural consumers.

113. The National Electricity Policy and the National

Tariff Policy talk of minimum level of support to make the

electricity affordable for consumers of very poor category.

According to these policies consumers below poverty line, who

consume less than a specified level, say 30 units per month,

can receive a special support through cross subsidy. Tariffs for

such designated group of consumers will be at least 50% of

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the average cost of supply. That means beyond 30 units per

month, such consumers will be liable to pay regular tariff.

114. For all consumers who are being cross-subsidized by

the commission, a limit on consumption must be specified for

which special support through cross subsidy may be given,

but once the consumer exceeds that limit he should be

charged at the normal tariff. In this regard, for the year

2007-08, parameters shall be fixed by the Commission. To

effectuate the order, we consider it necessary to press into

service Section 55 of the Act of 2003. As per Section 55 of the

Electricity Act, 2003, a licensee is required to supply electricity

through installation of correct meters in accordance with the

Regulations made by the concerned authorities. Therefore,

metered supply of power shall be given to every consumer of

electricity including those who are subsidized or cross

subsidized. In order to give effect to this direction the work

should commence within three months and completed by the

end of March, 2007 by the Board/Discom.

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115. Under Section 65, State Government can grant

subsidy to any consumer or class of consumers in the tariff

determined by the State electricity regulatory Commission

under Section 62. The State government is required to pay

subsidy in advance and in such manner as may be specified

by the regulatory commission. If the payment is not made in

advance and in such manner as may be directed by the State

commission, the tariff fixed by the State Commission shall be

applicable. As per para 8.3 of the National Tariff Policy,

payment of direct subsidy is a better way to support the

economically weaker sections of consumers than the

mechanism of cross subsidizing the tariff across the Board.

As a substitute of cross subsidy, the State government has the

option of raising resources through mechanism of electricity

duty and giving direct subsidies to only needy consumers. It

is the option of the State government to** subsidise or not to

subsidise. It is also the option of the State government, in

case they decide to give subsidy, to determine** the extent to

** Corrected as per the Order dated 25th July 2006 ** Corrected as per the Order dated 25th July 2006

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which the subsidy shall be given. In case the State

Government decides to give subsidy as a substitute for cross

subsidy, it will be a better way to support the poorer sections

of the society, but as already pointed out, the option lies

entirely in the hands of the state government.

116. Keeping in view of the provisions of the Act, the

Commission was bound to require the Government to pay the

outstanding subsidy including Rural Electrification subsidy.

The manner of payment was also to be specified under section

65 of the Act by the Commission and the State government

would be bound by such specification. Section 29(2) (d) and

(e) and Sub-section (5) of Section 29 of the 1998 Act is also to

the same effect. It can not be left to the discretion of the State

how the subsidy is to be paid to the Board. The State appears

to be adjusting subsidy against the interest allegedly due

from the Board on account of Government loans which is not

permissible, as the Act provides for actual payment as a

statutory obligation. Factually, subsidy has not been paid in

cash and has merely been adjusted not against the principal

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but against interest. In any case, if subsidy would have been

adjusted against the principal amount, the loans would have

been substantially reduced and consequently, the interest

payable by the Board would have come down drastically.

117. In view of the aforesaid discussions, we direct that

**the Commission shall determine the following:

i) What is the total amount of subsidy payable by the

State to the Board including cash and RE subsidy

without any adjustment of earlier loans or interest?

ii) What should be the mode of payment of subsidy?

iii) To what extent the subsidy could be applied or

adjusted towards the principal (loans)?.

iv) What is the amount of interest payable by the Board

to the State?

v) What is the quantum of amount which the state has

failed to disburse towards RE subsidy?

118. It will be open to the Commission to call for the

record of the Board and the State including their statement of

Accounts to determine the issues. The Board and the State

Government shall be duty bound to assist the Commission in ** Corrected as per the Order dated 25th July 2006

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coming to the right conclusion. In case the Commission is of

the opinion that it would need the assistance of an expert or

experts, it shall nominate the expert(s) in consultation with

the Board, the State and representative of the consumers.

Before relying upon the report of the expert (s), the same shall

be furnished to the aforesaid parties and it will be open to

them to respond. After considering all aspects of the matter,

the Commission shall determine the aforesaid questions. In

case, if the Govt. fails to respond, the Commission may draw

adverse inference and arrive at its own conclusion on the

materials made available.

119. We further direct that:

i) The Commission shall determine the cost of supply

of electricity to different class and categories of

consumers;

ii) The Commission shall also determine the average

cost of supply;

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iii) Once the figures of cost of supply and average cost

of supply are known, the Commission shall

determine the extent of cross subsidies added to

tariff in respect of each class/category of

consumers; and

iv) The consumers who are being cross subsidized by

the Commission, a limit of consumption shall be

specified for which special support through cross

subsidy may be provided. Once the consumer

exceeds the limit, he shall be charged at normal

tariff. These directions shall be applicable from the

next tariff year onwards.

E. Disputes with regard to Revenue Requirement for Tariff Year 2005-06.:

120. Some dispute was raised by the Industrial

consumers with regard to the annual revenue requirement of

the Board for the tariff year 2005-06. The plea was taken on

the ground that there was discrepancy between the revenue

requirement mentioned in Table no. 7.44 of the tariff order for

the year 2005-06 and revenue requirement mentioned in table

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no. 9.6 thereof. We have perused table nos. 7.44 and 9.6.

Table no. 7.44 shows total revenue requirement of the Board

as Rs. 7863.54 crores, while in table no. 9.6 total revenue

requirement as Rs. 8135.29 crores has been set out. The

figure of Rs. 7863.54 crores in table no. 7.44 does not include

revenue gap of Rs. 268.58 crores for the year 2004-05.

Therefore, the total revenue requirement of the Board is Rs.

7863.54 crores plus Rs. 268.58 crores, aggregating to Rs.

8132.12 crores. Thus, we find there is no discrepancy between

the figures reflected in table nos. 7.44 and 9.6.

F. Diversion of Funds

121. It was submitted by the learned counsel for the

industrial consumers that interest bearing loans were

procured for capital investment but they were used to meet

revenue deficit. It was pointed out that except Rs. 100 crores,

the Commission has allowed pass through of the entire

burden of interest on diverted loans to the consumers for the

year 2004-05. The learned counsel contended that interest on

these loans ought not to have been passed on to the

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consumers at all for the year 2004-05. On the other hand, it

was submitted by the learned counsel for the PSEB that the

Commission has wrongly disallowed interest of Rs. 100 crores

each for the tariff year 2004-05 and 2005-06 while

determining the annual revenue requirement of the Board for

the aforesaid period. The learned counsel for the Board

contended that when the Board was saddled with the interest

liability, the Commission was not justified in disallowing

interest cost of Rs. 100 crores for each of the aforesaid years.

He pointed out that the Board is aggrieved by the orders of the

Commission for the tariff year 2004-05 & 2005-06, inter alia,

on the ground of disallowance of the interest cost of Rs. 100

crores which the Board has actually incurred.

122. There is no dispute that the loans procured for

capital investments were diverted by the Board to meet its

revenue expenditure. This manoeuvre of the Board is not in

keeping with the sound accounting principles. At the same

time it is inconsistent with the provisions of the Act of 2003.

The learned counsel for the Industrial Consumers submitted

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that the situation has been aggravated further by saddling the

consumers with the interest liability which accrued on

account of the loans secured for capital investment. The

Commission in its various tariff orders highlighted the malady

and impressed on the State government to remedy the

situation but nothing has been done by the State. Not getting

any favourable and constructive response from the

Government, the Commission disallowed interest of Rs. 100

crores each for the years 2003-04; 2004-05 and 2005-06 from

the allowable interest. At this stage, it will be useful to set out

the observations of the Commission in regard to the question

of diversion of funds, from the various tariff orders:

Tariff Order 2002-03

“The objectors have also highlighted that booking of expenditure on account of interest charges on loans raised to meet revenue deficit in the past year, to revenue account is not permissible. The Board, in its various submissions has accepted the fact of diversion of funds from capital account to meet revenue deficit. The Government has also agreed with this Statement of the Board. It is an undisputed and accepted accounting principle that such diversion of funds from capital to meet revenue deficit is not permissible. And even if this practice has been indulged in, the burden of interest cannot be passed on to the consumers. However, to work out the exact diversion of funds in earlier years, the Commission had to put frame

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on a reliable basis and then get information from the Board to work out the exact amount. Due to non availability of such data readily from the Board, the Commission is left with no alternative but to allow all the interest burden to be passed on to consumer for this year. The Commission would however like to examine the matter in detail by next year filing of ARR after obtaining required information from the Board.


On a careful examination of the above objections, the Commission has found considerable force in them. The capitalized cost of the RSD Project was determined by the State Government at Rs. 5414.44 crores in the year 2000. Further, this cost was apportioned between the PSEB and the irrigation Department in the ratio of 79.1 and 20.9. The share of the PSEB in the capitalized cost comes to Rs. 4282.82 crores. For a power project with an installed capacity of 600 MW (out of which share of PSEB is restricted to about 75%), this cost is clearly too high, even though this is the actual cost incurred. The cost of the project got escalated due to many reasons, including the inordinate delay of several years in its completion. Further, even when this project has been completed, its full power potential cannot be realized till another large project Shahpur Kandi Project, below the RSDP is executed. Similarly, the apportionment ratio looks heavily loaded against the PSEB. Because of overvaluation of this asset, the consumers are paying unusually high costs in the form of interest, depreciation and ROR. A sizeable portion of these costs can be regarded as unjustified. At these costs, the per unit of energy supplied by RSDP is proving to be two to three times as costly as the costliest power being presently purchased by the PSEB. The PSEB is carrying loans amounting to Rs. 3900 crores from the financial institutions. The annual interest on

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these loans amounts to Rs. 497.90 crores. Many of the older loans carry as high an interest as 17.5% per year. In today’s set up, loans are much cheaper and most well managed business concerns are exchanging their old, expensive debts for cheaper ones. PSEB has informed that Power Finance Corporation has restructured its loan of Rs. 112 cores, reducing the rate of interest from 17.5% to 12% per annum. With its poor financial status and in the absence of full backing of the State Government, the PSEB is finding it very difficult to make much headway. All the same, the consumers’ grievance is well founded. The audited Balance of the Board for the year 2001-02 (which is the latest audited balance sheet available) shows an outstanding subsidy of Rs. 5470 crores as recoverable from the State Government Objectors have Stated that this is the main reason for the current financial problems of the Board. According to them, either the Government should pay to the Board the whole of this amount or at least it should pay interest on this amount to the Board especially when the Government is recovering Rs. 553 crores per year from the Board as interest on the Government loans advanced to the Board. According to the Board, the accumulated subsidies relate to R.E. subsidy and cash subsidies. The Government has, however, vide its letter No. 2/381/9611/PE(s) 24038 dated 11.11.1997 made it clear that RE subsidy due to the Board is to be limited to the amount of interest due from the Board to the Government on the loans taken from the Government The interest payable to the State Government for period prior to 1998-99 already stands adjusted against RE subsidy due in respective years. As the interest payable to the State Government by the Board for the year 1998-99 to 2001-02 totals upto Rs. 2228.10 crores, the amount of subsidy payable by the Government to the Board for these years has also to be restricted to this amount only as against Rs. 5470.04 crores exhibited by the Board. Thus the subsidy due from the Government has been over Stated by the Board to the extent of Rs.

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3241.94 crores as on March 31, 2002. This point has also been raised in the Audit Report on the balance sheet of the Board. There is, of course, an additional claim of the Board against the Government on cash subsidy to be allowed to the Board due to grant of free power supply to agricultural pump set users with effect from February 1997. This claim of the Board rests on the commitment made by the then Chief Minister. Punjab on the floor of the Vidhan Sabha to the effect that the Board shall be compensated in cash for the losses incurred by it due to non-realization of revenue which was being collected from the agricultural pump set users till then. Though the assurance of the Chief Minister has not been followed up with a formal Government order sanctioning the grant, the Board has continuously been raising this claim against the Government. However, no firm commitment has been made by the Government in this regard. On April 4, 2003, the Commission wrote to the State Government specifically asking for its view with regard to payment of unpaid subsidies, especially the cash subsidies. The reply from the State Government stated that:- (a) It is the view of the State Government that the

Commission is not legally bound to resolve pending issues between the PSEB and the State Government especially those pertaining to the period before the Commission became functional.

(b) The liability of the State Government to pay R.E.

subsidy was contained within the limit of the annual interest payable by the PSEB on loans extended by the Government to the PSEB. Even this liability stood terminated by a decision of the Government during 1990-91. (However, during discussions of the representatives of Punjab Government with the Commission on 19th May, 2003, it was conceded by the Officers of the Punjab Government that Government may accept liability for RE subsidy upto the extent of annual interest payable by the PSEB on

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loans advanced by the Government. Actually, Government of Punjab has been allowing this).

(c) The State Government would address this issue

further while undertaking the financial restructuring of the PSEB.

In view of the explicit stand of the State Government, it is not appropriate for the Commission to say anything more on the subject except to express the hope that the issue will be resolved at an early date, finally and to the satisfaction of all concerned. If the subsidy due from the Government is reduced by the overstated amount of Rs. 3241.94 crores, the balance sheet will acquire a very different appearance with regard to the accumulated losses. These losses will go up from Rs. 272.39 crores as on March 31, 2002 to Rs. 3514.33 crores. To overcome this cash crunch, the Board has utilized the funds generated from items like depreciation, consumer contributions and deposits, provident fund and working capital loans. The Board also adopted the device of defaulting on some current liabilities like power purchases, coal purchases due to suppliers. Such measures may be permissible only to tide over a passing crisis because they do not solve the problem but only postpone it. Over a medium or longer period, they can prove to be ruinous and thus they can never pass the test of prudent expenditure. Resources raised through depreciation amounts, consumer deposits and consumer contribution are not meant to be used to meet revenue expenses but are solely to be deployed for capital formation (i.e. creating new assets or replacing existing assets) or for repayment (or redeeming) of capital liabilities. They are investible funds available at zero cost. If they are utilized to make up a revenue gap, corresponding amount will have to be borrowed from the market for investment, which means that instead of utilizing zero cost resources, the Board is opting for costly funds. For all purposes, it can be stated that these costly funds

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have been called up to meet the situation created by the need to fill up a revenue gap. In other words, it can be said that loans raised for capital expenditure have been diverted to meet the revenue expenditure at least till the time the revenue gap is eliminated through higher profits, efficiency gains or Govt. subventions. Clearly, the interest cost of such loans is not a fit cost to be passed on to the consumers.

Looked at from another angle, such diversions will also result in a mismatch between net assets and capital liabilities since there will be some loans against which no assets could be shown to have been created. Net assets of the Board excluding subsidy receivables, as per the balance sheet for 2001-02, are Rs.11204.20 crores. An equity capital of Rs. 2806.11 crores was also available for creation of these assets. Thus, quantum of loan which could be reasonably raised by the Board against net assets was Rs. 8398.09 crores. Against this, the loans actually availed by the Board (including projected working capital loans of Rs.827.71 crores, GPF and pension funds) amount to RS.10436.57 crores, indicating an excess of Rs. 2038.48 crores. Also, there were "other current liabilities" of RS.1880 crores, bulk of which

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consisted of unpaid fuel/power purchase related dues and pending supplies/works related bills.

The above analysis pertains to the balance sheet for the year 2001-02. The Commission has good reasons to believe that the situation could not have changed much during the year 2002-03, especially with regard to accumulated losses since in the revised ARR for 2002-03, the Board has projected a revenue gap of Rs. 1401 crores, out of which the Commission has accepted a gap of Rs. 324.94 crores only.

The Commission is conscious of the fact that the situation which prevails in the Board is due to historical factors and events which took place before this Commission came into existence. Otherwise also, these matters are to be settled mutually by the Government and the Board. In fact, in response to the suggestions of the Commission, the Government has conveyed its willingness to address these issues pertaining to re-apportionment of RSDP, cleaning up the balance sheet and restructuring the finances of the Board, possibly through a medium term Financial Restructural Plan. However, the Commission feels that in performance of its duties laid down under the Electricity Regulatory Commissions Act, 1998, the Commission is required to probe such matters. Under Section 29 of this Act, the Commission is the sole authority for fixing the tariffs and it is to fix the tariffs after following the guidelines given in Section 29(2). Section 29(2) is reproduced below:-

“The State Commission shall determine by Regulations the terms and conditions for the fixation of tariff, and in doing so, shall be guided by the following, namely:-

(a) the principles and their applications provided in sections 46. 57 and 57A of the Electricity (Supply) Act, 1948 (54 of 1948) and the Sixth Schedule thereto.

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(b) the case of the Board or its successor entities, the principles under section 59 of the Electricity (Supply) Act, 1948 (54 of 1948);

(c ) that the tariff progressively reflects the cost of supply of electricity at an adequate and improving level of efficiency;

(d) the factors which would encourage efficiency, economical use of the resources, good performance, optimum investments, and other matters which the State Commission considers appropriate for the purpose of this Act;

(e) the interests of consumers are safeguarded and at the same time, the consumers pay for the use of electricity in a reasonable manner based on the average cost of supply of energy;

(f) the electricity generation, transmission, distribution and supply are conducted on commercial principles;

(g) national power plans formulated by the Central Government”.

A harmonious interpretation of Section 59 of the Electricity (Supply) Act,1948 and other Clauses of Section 29(2) of the Electricity Regulatory Commissions Act, 1998 clearly implies that the Commission is bound to allow only such expenses/ costs in the ARR, which are properly chargeable to revenue and would generally be incurred in an organisation being run on commercial lines and operating at adequate and improving level of efficiency. The Commission is also required to take care of interests of consumers. Judged by these standards, the objections raised by the consumers cannot be brushed aside lightly. As an illustration, any expenses

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incurred to service the debt raised in the past to meet the revenue deficit cannot be admitted in the current ARR. It was on such considerations that in its last Tariff Order, the Commission had highlighted the issues pertaining to valuation of RSD, cleaning up the balance sheet of PSEB and the need for a Financial Restructuring Plan. The Commission, however, recognizes the practical difficulties which come in the way of an instant solution of the problems which have actually emerged over a number of years. By the same logic, it might cripple the Board financially if the Commission were to insist on a very strict-enforcement of the legal provisions, embark on a complicated exercise to determine- all the costs which ought not to be passed on in the current ARR and then actually pass an order disallowing all such costs. The Commission would like to approach the matter cautiously and allow the PSEB and the Government some more time to sort out these issues. In view of the above, the Commission has decided to disallow Rs. 100.00 crores out of a much larger amount claimed as interest on loans which were clearly obtained to bridge the revenue deficit in earlier years. At present, it is not possible for the Commission to precisely identify the total quantum of unjustified interest amount. For future ARR filings, the Board should clearly spell out the exact manner in which the accumulated liabilities/losses were funded, what was the extent and period for which funds meant for capital purposes were used to bridge the revenue deficits and what was the interest liability on such funds.

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Re-diversion of Funds

At the time of issuing Tariff Order for the year 2003-04, the Commission had asked PSEB to explain its position about diversion of capital funds towards revenue expenditure. PSEB had not given any satisfactory reply to this query at that time.

During the processing of ARR for the year 2004-05, the Board has further made certain submissions on diversion of funds vide letter of Member (Finance) dated October 20, 2004. It is stated therein that diversion of funds is mainly due to non-revision of tariff in earlier years as well as free AP supply. These ultimately has affected revenue receipts and the cost of operations going up. It is further stated that the historical mis-match cannot be balanced without total financial re-structuring of the Board's Balance Sheet. However, the accumulated losses and gap between capital funds and its utilization is being looked into in the Financial Restructuring Plan being finalized by the Government of Punjab. Further during the year 2003-04, there was no diversion of capital funds. It is also Stated that the Board has made earnest efforts to reduce the cost of loans and other finance charges which have resulted in the net interest and finance charges during the year 2003-04 coming down to Rs. 631.94 crores only from Rs.709.14 crores during the previous years. Disallowance of Rs.100 crores on ad-hoc basis by the Commission on account of RSDP cost, accumulated losses etc. is also mentioned.

Finally it is requested to allow total interest and finance charges as claimed in the ARR while finalizing the tariff for the year 2004-05.

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The Commission notes that the reply of the Board is rather general on the main issue of diversion of funds. Even in this, the Board accepts the fact of "historical mismatch" which can be remedied only through re-structuring of Board's Balance Sheet. The Commission also notes that the Board never commented about disallowance of Rs.100 crores in interest charges after issue of Tariff Order for the year 2003-04 in May 2003 and has first commented on it only now in October 2004.

In order to reach its own conclusions on the matter, the Commission has undertaken detailed exercise for assessment of extent of diversion of funds. In this connection it is noted that, the PSEB is an autonomous body created by the Government of Punjab under the statutory provisions of the Electricity (Supply) Act, 1948 for the specific purpose of generation, transmission and distribution of electricity in the State. For creation of the infrastructure, PSEB received funds from the State Government in the form of equity, loans, subsidy and grants for capital assets. Besides raising loans from the banks and various financial institutions, the Board utilized from time to time the funds available in the form of consumer contributions. The accumulations in GPF of the employees have also been utilized by the Board for this purpose with the prior approval of the State Government. The extent and effect of diversion of funds meant for capital expenditure ending the years 2002-03 and 2003-04 as assessed by the Commission is exhibited in Table below:

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Table - Diversion of Capital Funds

Amount (Rs. In crores) S.No Item

2002-03 2003-04

1. Net Fixed Block 8745.87 8492.78

2. Add works in progress

2315.30 2382.49

3. Less WIP of RSDP allocable to Irrigation Branch

1469.27 1444.21

4. Balance WIP (2-3) 846.03 846.03 938.28 938.28

5. Total (1+4) 9591.90 9431.06

6. Consumer Contribution

1229.73 1369.95

7. Grant & subsidy toward cost of capital assets

434.35 414.53

8. Total (6+7) 1664.08 1664.08 1784.48 1784.48

9. Balance capital base (5-8)

7927.82 7646.58

10. Requirement of loans+ Equity

7927.82 7646.58

11. Amount of GoP loans 4537.53 4537.53 12.

Less RSDP loans to be apportioned to irrigation [email protected]%

580.28 580.28

13. Balance GoP Loans (11-12)

3957.25 3957.25 3957.25 3957.25

14. Add other loans 4220.11 3836.60 15. Equity 2806.11 2806.11 16. Accumulations in

GPF 1269.19 1379.99

17. Less amount invested

112.78 151.47

18. GPF utilized by Board (16-17)

1156.41 1156.41 1228.52 1228.52

19. Actual loans +Equity

(13+14+15+18)

12139.88 12139.88 11828.48 11828.48

20. Amount Diverted 4212.06 4181.90 As per provisional balance sheet for the year 2003-04, the value of gross fixed assets of PSEB as on 31.3.2004 is Rs. 13402.08 crores. After deduction of accumulated depreciation of Rs. 4909.30 crores, the value of net

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fixed assets comes to Rs. 8492.72 crores. Besides net assets worth Rs. 8492.78 crores, the value of works-in-progress at the close of year is Rs. 2382.49 crores inclusive of works-in-progress amounting to Rs. 1444.21 crores pertaining to RSDP allocable to irrigation Branch. Thus, after adding net works-in-progress amount to Rs. 938.28 crores allocable to Board, the total assets work out to Rs. 9431.06 crores. Of these, the assets created with the funds available from consumers’ contribution, grants and subsidy towards capital assets work out to Rs. 1784.48 crores. This leaves the balance assets of Rs. 7646.58 crores. Thus, the requirement of loans and equity to finance these assets should have been limited to Rs. 7646.58 crores only. Against the above requirement, PSEB actually availed of loans and equity amounting to Rs. 11828.48 crores upto the period ending March 31, 2004. Clearly, the Board has availed loans of Rs. 4181.90 crores (11828.48-7646.58) in excess of its requirement for capital assets. This is obviously meant for diversion towards revenue expenditure. The PSEB has thus utilized these excess loans for purposes other than creation of assets. From the above table, it is also noted that the diversion of capital funds upto the end of financial year 2003 was Rs. 4212.06 crores. The diversion fund to the large scale continued during the year 2003-04 as well as the corresponding figure at the end of 2003-04 was Rs. 4181.90 crores. The fact of substantial diversion of funds is also proved by the perusal of Balance Sheets of the Board. As will be seen therefrom, at the end of the year 2002-03, the accumulated losses of the Board as reflected in the Balance Sheet were Rs.708.37 crores only. However, to this is required to be added unpaid R.E. subsidy to the Board to the extent of Rs.3241.94 crores, making total of RS.3950.31 crores. This is on

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account of the fact that though the Board has been claiming R.E. subsidy from the Government even beyond the interest chargeable on the Government loans to the Board, the Government has clearly refused to bear any burden on account of R.E. subsidy beyond the amount of interest due on Government loans. In view of the clear and consistent policy of the Government in this regard and the clear refusal of the Government, the claim of the Board towards RE. subsidy needs to be restricted only to the amount of interest on Government loans. The amount of unpaid subsidy of Rs.3241.94 crores represents subsidy claimed by the Board beyond the amount of interest on Government loans and as such is not payable by the Government. This, therefore, needs to be added to the accumulated losses taking the total accumulated losses to RS.3950.31 crores. These accumulated losses would clearly have been funded by the Board by taking loans from outside sources. Obviously the loans taken for other purposes, therefore, would have been diverted to fund the accumulated losses. Thus, even perusal of the Board's Balance Sheet substantiates diversion of funds to the order of Rs.4000 crores at the end of year 2002-03. The position continued during the next year 2003-04 as well. The accumulated losses are represented as Rs.542.58 crores in the provisional Balance Sheet for this year. There was no change in the figure of unpaid subsidy during the year 2003-04 as there was no question of R.E. subsidy after coming into existence of the Commission and its passing of Tariff Order. Therefore, only unpaid subsidy of Rs.3241.94 crores as above is to be added to work out the total accumulated losses. Adding accumulated losses to unpaid subsidy, the total accumulated losses at the end of 2003-04 work out to Rs.3784.52 crores which is roughly at the same level as the year before. This

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proves that the substantial diversion of funds continued during the year 2003-04 as well. The diversion of Capital fund is not an accepted practice. More importantly, it has carrying cost by way of interest on the borrowed funds so diverted. Appropriately, these carrying costs need to be borne either by the Board or the Government. The Commission feels that the consumers should justifiably not be burdened with these costs. The Commission has given time to the Government and the Board in its past two Tariff Orders to undertake the restructuring and to clear these costs from the Balance Sheet. However, adequate progress in this regard has not taken place as no concrete results are reflected by way of clearing of these costs in the Balance Sheet. The Commission is alert to the fact that the costs are real as far as Board is concerned and are direct results of events prior to setting up of the Commission. As such, taking a considerate view, the Commission decides to continue its past practice of disallowing Rs.100 crores towards this liability and allows only balance to be charged from the consumers through the tariff. The Commission, therefore, disallows interest of Rs. 100 crores from the amount of interest allowable for the year 2004-05. Interest on fresh borrowings of Rs. 1090.00 crores has been calculated at Rs. Rs.45.44 crores. Consumers contribution of Rs.139.68 crores, say Rs.140.00 crores (estimated at previous year's level as per provisional accounts for the year 2003-04) is likely to be received during the current year. As such, the actual borrowings for investment will be to the tune of Rs.869.00 crores after adjustment of this amount. Therefore, interest on fresh borrowing has also been proportionately reduced by RS.6.30 crores being

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interest on Rs.140.00 crores. Thus, the interest amount for the year 2004-05 will work out to RS.875.62 crores as above.

The Commission, therefore, approves interest and finance charges of Rs. 944.31 cores (gross) and Rs. 875.62 crores (net) after capitalization of Rs. 68.69 crores for the year 2004-05.


As analysed by the Commission in its earlier Tariff Order (and not disputed by the Government of Punjab or the Board), there is a huge mismatch (amounting to more than Rs.4000 crores) between the assets and liabilities of the Board. Alternately, the Board is carrying accumulated losses of more than Rs.4000 crores. Either way, the Board is compelled to constantly carry a corresponding burden of unproductive debt. Going strictly by commercial principles, the cost of this debt cannot be treated as a pass through, legitimate revenue expenditure. The Government of Punjab itself had Stated in its comments on the ARR for the year 2002-03 that interest costs of loans which do not result in benefits to the consumers cannot be passed on to them.

There is only partial justification in the arguments that the consumers must cheerfully bear this burden which is historical and is entirely due to the reason that these losses occurred because tariffs were not raised sufficiently in the past and thus the consumers alone benefited from this cause. There are at least two other equally important reasons for these recurring losses viz. the inability of the Board to achieve reasonable levels of operating efficiencies in the past and the failure of the Government (in the period prior to the commencement of the regulatory regime) to either provide subventions to the Board to liquidate annual losses or to resolve the issue of large unpaid RE subsidies,

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as was Stated, year after year, in the Balance Sheet of the Board.

If the Commission is to go by the letter and spirit of the Electricity Act, 2003, it must decide that it is the obligation of all the three major stakeholders - the Government of Punjab, the Board and the consumers - to discharge such obligations. Even though it is a generally accepted principle of corporate business that accumulated losses have to be taken care of by the owners, the Commission feels that all the three must make broadly similar sacrifices in such situations. Furthermore, the Government of Punjab had accepted its responsibility to clean up the Balance Sheet of the Board and the State Government has been constantly assuring the Commission for the last three years but unfortunately, the required process has not been completed till date.

It may be stated here that the consumers are currently being made to discharge another large obligation from which they deserve relief. In the last few years, the interest rates have fallen all around. Like all other commercial organizations, and also in response to directions of the Commission, the Board has been successfully exchanging its old debts for cheaper and easier loans as a result of which the average interest rate being paid by the Board on the institutional loans has already come down to 7.05 - 11.5 percent from the earlier rate of 11.5 - 18 percent. However, the Government of Punjab has shown no such accommodation to the Board in respect of its large portfolio of loans aggregating to Rs.4537.53 crores. Legitimately, the consumers could expect a relief of around Rs.100 crores on this account.

In the above stated circumstances, the Commission feels that the decision to disallow interest cost of RS.100 crores is just, reasonable and fair and is in no way harsh. The Commission further feels that within the provisions of the law the Government of Punjab cannot be directly

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burdened with any such charges.

On the basis of above decisions, the Commission approves interest and finance charges as given in Table below:

Interest Charges approved for the year 2005-06

(Rs. In crores)

S.No. Particulars Loans o/s as on 31.3.05

Receipt of loans

Repayment of loans

Loans o/s as on 31.3.06

Amount of interest

1 2 3 4 5 6 7 1. As per ARR (other than WCL &

Government loans) 4124.66 1876.00 840.19 5160.47 56537

2. Approved by Commission (other than WCL & Government loans)

3825.66 *1060.00 840.19 4045.47 479.27

3. Working capital loan 600.00 518.74 600.00 518.74 37.71 4. Government loans 4537.53 - - 4537.53 480.73 5. Total (2+3+4) 8963.19 1578.74 1440.19 9101.74 997.71 6. Add finance charges - - - - 15.90 7. Grand Total 1013.61 8. Less capitalization - - - - 102.20 9. Net interest & finance

charges - - - 911.41

Receipt of loans of Rs.1060.00 crores = Approved investment of Rs. 1200 crores -consumer contribution of RS.140 crores

Thus, net interest and finance charges work out to Rs.911.41 crores for the year 2005-06. Out of this amount, Rs.100 crores is to be disallowed on account of diversion of capital fund for revenue purposes for the year 2005-06 as was decided by the Commission in para 7.15.8 of the Tariff Order for the year 2004-05. The net interest and finance charges, thus, work out to Rs.811.41 crores for the year 2005-06.

The Commission, therefore, approves net interest and finance charges of Rs. 811.41 crores net of capitalization of Rs.102.20 crores for the year 2005-

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06”.

123. It seems to us that the Commission has correctly

analyzed the situation that the consumers are being burdened

with interest on account of diversion of funds. The

Commission was also entirely right in its view that borrowings

made for the purpose of capital expenditure have been wrongly

diverted for the purpose of meeting the revenue deficit. But in

practical terms, except for relieving the consumers of Rs. 100

crores interest for each of the aforesaid years, the rest of the

interest was saddled on them by the Commission. While

disallowing the aforesaid amount, the Commission had also

expressed the view that Section 59 of Electricity (Supply) Act,

1948, Section 29(2) of the Electricity Regulatory Commissions

Act, 1998 imply that the Commission is bound to allow only

such expenses/ costs in the ARR, which are properly

chargeable to revenue and would generally be incurred in an

organization being run on commercial lines and operating at

adequate and improving levels of efficiency, that the

Commission is required to take care of the interests of the

consumers, that in view of the statutory provisions, the

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objections raised by the consumers cannot be brushed aside

lightly, and that any expenses incurred to service the debt

raised in the past to meet the revenue deficit cannot be

admitted in the current ARR. Even though, it was the

consistent opinion of the Commission that diversion of funds

is impermissible, yet it has allowed pass through of the bulk of

the interest, ostensibly on the ground that in case the Board is

asked to bear the entire interest load, it will have a crippling

effect on its financial resources.

124. Basically, the main reasons for the diversion of

funds are related to RSD cost allocated to the Board, subsidy

including RE subsidy, high rate of interest of Government

loans etc. In view of such heavy burden, the Board requires

funds for its revenue expenses. The Board appears to have

adopted the strategy of diversion of funds because of the

necessity created by the aforesaid burden imposed on it.

125. In the tariff order for the year 2003-04, it is pointed out

by the Commission that the balance sheet of the Board for the

year 2001-02 showed an outstanding subsidy of Rs. 5470

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crores as recoverable from the State Government According

to the Board this amount related to rural electrification

subsidy and cash subsidy. As already noted, rural

electrification subsidy due to the Board from the government

was unilaterally limited to the amount of interest accrued due

from the Board to the government on the loans extended by

the government. That means the outstanding subsidy amount

was not adjusted against the principal amount due from the

Board to the government, and only the interest payable by the

Board to the State government was adjusted against the RE

subsidy. Even with regard to cash subsidies, which were due

from the government to the Board, the State did not like the

intervention of the Commission when the Commission took up

the matter with the State Government through its

communication dated April 4, 2003. The State Government

replied that the Commission is not legally bound to resolve

pending issues between PSEB and the State Government

This stand of the State Government is inconsistent with the

provisions of the Act of 1998 since these are not issues

concerning the Board and the State alone but they are issues

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having an impact on tariff payable by the consumers. These

are actually tariff issues which fell within the domain of the

Board. The Commission ought not to have felt bound by the

view expressed by the State of Punjab in the aforesaid letter

and ought not to have allowed heavy financial burden on the

Board to continue.

126. It also needs to be pointed out that the Board had

exchanged its institutional debts for cheaper ones. As a

consequence thereof the average interest rate came down to

7.05% – 11.5%P.A. from the earlier rate of 11.5% - 18% P.A. .

In so far as the Government of Punjab is concerned, it did not

scale down the rate of interest in respect of the loan of Rs

4537.53 crores standing to the account of the Board. The

aforesaid factors and RSD cost seem to have substantially

contributed to the financial crunch which the Board has been

facing.

127. It has been pointed out by the Commission that the

total assets of the Board are to the tune of Rs. 9431.06 crores.

Out of these, the assets created with the funds available from

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the consumers’ contributions, grants and subsidies work out

to Rs. 1784.48 crores. Therefore, the value of the balance

assets is Rs. 7646.58 crores. It has been rightly observed by

the Commission in the tariff order for the year 2004-05 that

the requirement of loans and equity to finance these assets

should have been limited to Rs. 7646.58 crores only, but the

Board took loans amounting to Rs. 11828.48 crores during the

period ending with March 31, 2004. Thus, the Board availed

loan of Rs. 4181.90 crores in excess of its requirement for

capital assets. This, according to the commission, were meant

for diversion towards revenue expenditure.

128. It seems that the Commission felt that these mistakes

cannot be corrected as the State government is insulated from

its directions relating to tariff issues. This perception cannot

be countenanced in law as otherwise tariff cannot be

determined according to the parameters and factors laid down

in Section 61 of the Act of 2003. The Commission is required

to determine the tariff by seeking guidance from factors which

would encourage economical use of the resources and

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optimum investments and at the same time safeguard the

interests of the consumers and recover the cost of electricity in

a reasonable manner etc. (see Section 61 particularly 61(c), (d)

and (g).

129. It appears to us that the breach of financial discipline

by the Board violates the provisions of Section 61 of the Act of

2003 and corresponding provisions of Section 29(2) of the Act

of 1998. Since the issue of diversion of funds is interlinked

with other issues namely RSD cost allocation, subsidy, high

rate of interest on Government loans etc., the controversy

relating to the extent of interest which can be allowed as a

pass through can not be resolved unless the other issues are

also decided by the Commission as directed by us. The

resolution of these issues are bound to take time and cannot

be decided without relevant data. Therefore, relief can only be

given to the consumers for the future years.

130. In view of the foregoing, we direct that for the year

2006-07 the issue relating to the extent of interest which can

be allowed as a pass through shall be determined and resolved

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by the Commission alongwith the determination of the issue

relating to RSD cost allocation, subsidy and high rate of

interests on Govt. loans. This shall be accomplished during

the truing up exercise for the year 2006-07.

G. Re. Higher tariff rate for peak load supply: 131. Learned counsel for some of the industrial

consumers submitted that the Board has wrongly allowed

peak hour exemption charges to be recovered from the

consumers. In the impugned tariff order dated November 30,

2004 for the year, 2004-05 it has been pointed out by the

Commission that there is an acute shortage of power in the

State of Punjab, especially during peak load hours. The

Commission also pointed out that the over drawing** of power

under Availability Based Tariff (ABT) regime during the peak

hours, costs much higher than the average power

purchase cost. The Commission while considering the

matter recorded as under:-


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“The Commission has considered the matter and notes that there is no denying the fact that there is acute shortage of power in the State especially during peak load hours. Overdrawing under ABT during this period costs much higher than the average power purchase cost and goes upto even Rs 6/- per unit. The Commission also notes that recoveries made through PLEC are duly accounted for in the tariff income of the Board. As such, both the additional cost of power purchase during peak hours and the recoveries through PLEC are duly taken care of in the Board’s expenditure and receipts. The system therefore, does not require any change in this regard. The existing rate of PLEC is also not considered unreasonably high especially in view of the exorbitant extra costs of power purchase involved. The Commission further notes that in acute shortage situation of power in peak hours, the PLEC has to be based on the extra load reserved by the consumer and not as per actual use. This is because if the Board reserves the load for the consumer, it is committed to supply that power and has to make arrangement accordingly to fulfill this commitment. In view of the commitment of the Board which in any case stands, it is not so material whether the extra power is actually drawn by the consumer or not”.

We do not find any error in the reasoning of the Board and we

affirm the same. The contention of the Industrial Consumers

is rejected.

H. Re Employees’ Cost++:-

132. Both, industrial consumers as well as the PSEB

have questioned the determination of employees’ cost++ by the

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Commission. The Commission by its tariff order dated June

14, 2005 allowed cumulative increase of 15.61% for the year

2005-06 in the approved level of employees’ cost++ of the

Board of Rs. 1274.66 crores for the year 2002-03. The

Industrial Consumers are aggrieved of this cumulative

increase in the employees’ cost++, as reflected from their

memo of appeals. It is pointed out by the learned counsel

appearing on behalf of the Industrial Consumers that for the

year 2002-03, the Commission in its first tariff order had

allowed the entire employees’ cost++ as claimed by PSEB as

pass through with the rider that for the next year the

employees’ cost++ will remain capped. Consequent to this

order, the employees’ cost++ remained capped for the year

2003-04. It also remained capped for the year also 2004-05.

But contrary to the aforesaid capping of the cost, the

Commission has allowed cumulative increase of 15.61% in

employees’ cost++ for the year 2005-06, which works out to

Rs. 1473.63 crores.

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133. On the other hand, the Board is aggrieved of the

fact that the Commission had pegged the employees’ cost++ as

a result of which no increase was allowed for the year 2004-

05. it is also dissatisfied with the increase effected by the

Board for the year 2005-06 on the ground that the increase

was inadequate for meeting the employees’ cost++. It is

mainly for this reason that the Board has filed the instant

appeals (Appeal nos. 54 and 55 of 2005).

134. It is not in dispute that the Commission has, on an

analysis of the data, came to the conclusion that the

employees’ cost++ of the PSEB is the highest as compared to

the other State electricity Boards. The Commission compared

the employees’ cost++ of seven Boards including the State of

Punjab for the years 2001-02 and 2003-04 by referring to the

following tables:

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EMPLOYEES’ COST++ OF THE BOARD COMPARED TO OTHER STATE ELECTRICITY BOARDS FOR THE YEAR 2001-02

S.

No

State Electricity Board

No. of Consumers in million

No. of Employees

Employee per MU of electricity sold

Employee per 1000 consumers

Shate of Estt/ Admn in total cost %

Estt. Expenses in paise/Kwh of sale

1 2 3 4 5 6 7 8

1. Andhra Pradesh 13.55 61671 2.07 4.55 7.07 25.51

2. Gujarat 7.10 47782 1.46 6.73 9.79 35.76

3. Karnataka 10.82 38106 1.95 3.52 12.58 47.14

4. M.P. 8.14 88572 3.34 10.88 14.00 45.49

5. Maharashtra 12.98 111724 2.37 8.61 12.03 43.00

6. Punjab 5.37 84171 3.65 15.67 19.26 54.94

7. Tamil Nadu 14.42 93504 2.57 6.49 15.59 48.29

8. U.P. 9.38 62740 2.24 6.69 13.11 50.30

9. Average of all SEBs in India

2.53 7.59 12.70 44.50

10. All India Average (SEBs/ Deptts)

2.60 7.78 12.69 44.40

COMPARATIVE ANALYSIS FOR THE YEAR 2003-04

S.No Name of State

Electricity Board

No. of Consumers

No. of Employees

Energy sold in MU per Employee

No. of consumers per Employee

% of estt. Exp. To total cost %

Estt. Expenses in paise/Kwh of sale

Circuit

in Km

per

employee

1 2 3 4 5 6 7 8 9 1. Andhra

Pradesh 15870287 76679 0.45 207 3.91 - -

2. Gujarat 9958056 51537 0.74 193 6.92 24 7.84

3. M.P. 6597849 74648 0.21 88 12.82 52 7.24

4. Maharashtra 16927863 103038 0.50 164 13.59 42 6.67

5. Punjab 5705751 96295 0.24 59 20.48 56 2.95

6. Rajasthan 5747725 11687 1.31 492 5.91 26 -

7. Tamil Nadu 17025652 83949 0.47 203 13.13 40 7.33

135. From a perusal of the charts, the following facts are

clearly established:-

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i. The number of consumers of electricity in the State of

Punjab is the least as compared to the other six States

referred to in the charts.

ii. PSEB sells 0.24 MU per employee, which puts the Board

in the second lowest position in the matter of sale of

energy per employee.

iii. Each employee of the PSEB caters to 59 consumers in

the State of Punjab. This ranking is the lowest amongst

the seven SEBs.

iv. PSEB has the highest percentage of establishment cost to

total cost as it constitutes 56 Paise/ Kwh cost of energy

sold, which is also the highest compared to other six

States.

v. The Boards per employee cable line circuit is the lowest

being 2.95 Km/ckt cost against 7.84 Km/ckt in respect

of Gujarat State.

136. The Commission has noted that the position which was

prevailing in the year 2001-02 has not improved even in the

subsequent years. It appears that nothing substantial has

been done by the Board to reduce the employees’ cost++.

However, in Para 5.13(h) of the Memo of Appeal of the Board,

it has been stated that the Board has taken the following steps

for curtailing the employees’ cost++:

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i) The Board has not been recruiting employees since the

year 1996, except in case of specific need based

recruitment, which was unavoidable.

ii) Employees have been redeployed.

iii) The Board has imposed a ban on creation of new

posts.

iv) Persons are being engaged on contract basis to meet

critical requirements.

v) The Board has adopted new policy on November 23,

2004, for payment of lump sum compensation in lieu

of appointment and liberalized family pension in case

of death of an employee during service on

compassionate grounds, in place of its existing policy

of providing payments to the widow/ dependents of the

deceased employee.

vi) The Board has adopted a new pension policy dated

October 18, 2004 for contributory pension for new

recruitees.

137. Though the Board has claimed to have taken

initiatives for curtailing the employees’ cost++, it seems that

these initiatives are mere cosmetic in nature. On the one

hand the Board says that it has not been recruiting people

since 1996, on the other hand it says that need based

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recruitment, which is unavoidable in nature, is being made. It

has not been stated as how many persons have been recruited

under the pretext of need based recruitment.

138. The main plank on which the Board has assailed the

impugned orders of the Commission with regard to employees’

cost++, is that the Commission has over looked the fact that

Board cannot substantially reduce employees due to certain

obligations cast upon it under law. The Board is seeking to

justify the increase in the employees’ cost++ on the following

grounds:

i. Basic salary / increment: annual increment was assured

to the employees in terms of Punjab State Electricity

Board Main Service Regulations 1972 (PSEB MSR). The

rate of increment has been provided in the PSEBs Master

scale, which gives rise to average increase of 3.25 % p.a.

in the total basic pay.

ii. The Board has adopted recommendations of the 5th Pay

Commission, following the decision of the State

Government and accordingly Dearness Allowance (DA) to

the extent of 50% was merged with Dearness pay (DP).

This has resulted in an increase in the House Rent

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Allowance, leave encashment and terminal benefits

payable to the employees of the Board.

139. It is significant to note that in so far as the increase in

DA and merger of DA with DP of the employees of the Board is

concerned on the own showing of the Board, the benefits have

been extended in order to maintain parity with the employees

of the State Government. These benefits have been extended

on the ostensible ground that when the electricity undertaking

was transferred to the Board, it was stipulated that the salary,

allowances etc of the transferred employees were not to be less

favourable than the Government employees. It appears to us

that this condition applied only to the salary and allowances

etc, which were in vogue on the date of the transfer. This

stipulation does not in any manner guarantee same salary,

allowances for the PSEB employees as may be admissible to

the employees of the State Government in comparable posts.

There is no obligation on the part of the Board to extend same

salary and allowances to the employees of the Board as are

payable to the employees of the State Government The

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process of reforms which has been triggered by the Act of1998

and the Act of 2003 will lose its momentum in case salaries/

incentives are not linked to the performance of the employees.

There is nothing on record to show that there has been

improvement in the performance of the employees of the

Board. Benefit should be made available for rewarding

efficiency in performance. Automatic availability of benefits

generates inefficiency and indolence.

140. In R.C. Sharma Vs. Chief Secretary, Government of

Madhya Pradesh (1974) 3 SCC 160, three undertakings were

transferred from Government of MP to M.P. Industries

Corporation Ltd. The MP Government made a commitment to

the employees consequent upon transfer of their service to the

MP Industries Corpn. Ltd. to the effect that their emoluments

and other conditions of service and benefits will not be

affected. Subsequently, after the transfer there was increase

in rates of DA of the government employees. This benefit was

not extended to the employees of the MP Industries Corpn Ltd.

The Union filed an application under Section 33 C(2) of the

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Industrial Disputes Act, 1947 for payment of DA to the

employees of the company on par with the MP Government

employees. The application was dismissed by the Labour

Court. The union filed a Writ Petition before the High Court.

The Writ Petition too was dismissed by the High Court.

Thereafter, a Special Leave Petition was filed before the

Supreme Court on the ground that the company was bound to

give the same salary and benefits to its employees as were

payable by the State Government to its employees at all times.

While rejecting the submission of the union, the Supreme

Court held that the offer made by the MP Government and

accepted by the employees only protected the terms and

conditions of service, existing at the time of transfer and it did

not entitle the employees to secure benefits which the

Government might, in future, confer upon its employees. In

this regard, the Supreme Court observed as under:-

“The short question involved in this appeal is whether under the terms of the offer made and accepted by the employees they are entitled to the same Dearness Allowance as is being paid by the State Government to its employees. The first term made it quite clear that when the employees of the erstwhile undertakings of the State would join the service of the Corporation their subsisting pay and scale and other

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conditions of service and benefits to which they were entitled at that time would not be affected by the transfer. The case of the Union was that the second term or condition entitled them to the same Dearness Allowance which the employees of the Madhya Pradesh State Government were getting. Now this term or condition was confined only to the question of the effect of the transfer on the service of an employee. It was made clear that the transfer of service would not be treated as an interruption in his service. This was amplified by saying, “you will be entitled to leave and other benefits on the same basis as if your services under the State Corporation was a continuation of your total uninterrupted services under the said undertakings”. The High Court relied on an earlier decision given by it in Misc. Petition No. 237 of 1968, decided on March 26, 1969. According to that decision leave and other benefits that were secured under Condition 2 were leave and such benefits which depended upon the length of service, e g., gratuity, pension etc. The object of creating a fiction of continuity of service was not to make the Corporation employees Government employees and to make applicable to them any change effected in the conditions of service of Government employees; but what was intended was to secure to the transferred employees leave and benefits depending upon the length of service by making their service fictionally uninterrupted. Ordinarily the change of employers would have the effect of interrupting service. Condition No. 2 was, therefore, meant to overcome that situation. That condition dealt solely with the effect of the transfer of service on the benefits to which an employee would be entitled if there was no interruption in his service. The second sentence therein, namely, “in other words” etc. was merely explanatory of the first sentence that the transfer of service will not be treated as in interruption in the service. The second sentence was not intended and could not be read as meaning that whatever benefits an employee of the State Government were to get in future the employees of the Corporation would automatically become entitled to them. As pointed out by the High Court in the earlier judgment if Condition 2 was to be read as securing to a transferred

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employee benefits which the Government might in future confer upon its employees that would contradict Condition 1 which secured only such benefits to which a transferred employee was entitled at the time of transfer. We are in entire agreement with this view of the High Court. Mr. C.K. Daphtary who appeared for the industrial consumers tried to persuade us that Condition 2 should be so interpreted as to confer to the employees of the Corporation the same benefits to which the employees of the State became entitled in the course of subsequent years We are unable to construe Condition 2 in the manner suggested. All that that condition secured was that the employees should not suffer in the length of their service and in the enjoyment of the benefits which an uninterrupted service confers on them because of the transfer of their service from the State Government to the Corporation.”

141. The principle adumbrated by the Supreme Court

applies to the case in hand. In spite of the fact that the

Commission had capped the employees’ cost++ by its first

tariff order and there was no ground for holding that there has

been improvement in the functioning of the employees of the

Board, the Commission having regard to the increase in the

employees’ cost++ allowed cumulative increase of 15.61% for

the year 2005-06 in the approved level of employees’ cost++ of

Rs. 1274.66 crores. Thus, the employees’ cost++ for the year

2005-06 was worked out at Rs. 1473.63 crores. This increase

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of 15.61% was calculated by the Commission on the basis of

growth in wholesale price index of all commodities starting

from the year 2001-04 to 2005 every year.

142. The learned counsel for the Board submitted that

the employees’ cost++ of Rs. 1700 crores which had been

projected by the Board should have been allowed as these

expenses are uncontrollable. The learned counsel relied upon

the decision of the Supreme Court in WBERC Vs CESC, JT

2002 (7) SC 578, in which the employees’ cost++ claimed by

the WBSEB was allowed by the Supreme Court in the peculiar

facts and circumstances of that case. The payment on

account of wages including overtime and other welfare benefits

were made by the company under lawful agreements entered

with the workmen. During the currency of the agreements it

was not legally feasible for the company to stop those

payments. Therefore, the amounts expended toward the

employees’ cost++ was treated as amount properly incurred.

The facts of the present case are different. Here the Board is

extending benefits such as increase in salaries, DA etc to the

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employees to maintain parity with the employees of the

Government even though they are not legally bound to give

such benefits and there has been no improvement in the

performance of the Board employees. As already pointed out,

the comparative analysis of various parameters clearly

establish that the employees of the PSEB are not productive

and performance linked incentive shall be the requirement of

the day.

143. In the year 2001-02, employees’ cost++ constituted

56 P/Kwh of energy sold, which as already pointed out is the

highest compared to other six Boards. By an increase of

15.61% in the employees’ cost++, it will constitute about 61

P/Kwh cost of energy sold, which is clearly very high. But it

seems to us that for the year 2005-06, the increase may not be

interfered with as for earlier two years 2003-04 and 2004-05

no increase in the employees’ cost++ has been allowed. At the

same time we make it clear that in case the employees of the

Board do not improve their efficiency, the aforesaid employees’

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cost++ allowed by the Commission will remain capped till the

performance of the Board employees improve.

144. We also make it clear that we cannot allow a pass

through of Rs. 1700 crores as employees’ cost++ as demanded

by the Board. No worthwhile measures were adopted by the

Board to reduce the employees’ cost++ during the years in

question. Even Voluntary Retirement Scheme, which could

have been one of the options, was not adopted on the ground

that the State Government was not in a position to find funds.

These are mere excuses. The State Government itself had

taken stand during the year 2002-03 that the employees’

cost++ of Rs. 1316.50 crores claimed by the Board was quite

high. The Government was of the view that the employees’

cost++ at Rs. 1123.83 crores should be allowed based on

norms of 3-5 employees per MU of energy sold. Subsequently,

the same Government changed its stance for the year 2004-

05. It seems to us that it is not prudent for the Board to

employ excessive manpower.

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145. In the circumstances, we decline to interfere with the

decision of the Commission disallowing increase in the

employees’ cost++ for the year 2003-2004 and allowing only

Rs. 1473.63 crores as employees’ cost++ for the year 2004-

2005.

I. Separate Tariffs:

146. The learned counsel for the industrial consumers

contended that the Commission was bound to determine

separate tariff for the generation, transmission, distribution

and retail sale of electricity in consonance with the provisions

of Section 62(1) and 86 (1)(a) of the Act of 2003. It was

pointed out that the Commission arrived at tariff for retail

supply without determining separate tariff for generation,

transmission and distribution of electricity in clear violation of

law. On the other hand, learned counsel for the PSEB and the

PERC submitted that the PSEB, prior to the coming into

operation of the Act of 2003, was a vertically integrated utility

and has remained to be so. It was pointed out by them that

the PSEB has retained its character of an integrated utility in

accordance with the first proviso to Section 14 of the Act of

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2003 read with Section 172 (a) thereof. As a sequitur, it was

urged that since the PSEB remained vertically integrated

utility, the tariff for generation, transmission, distribution and

retail supply is not required to be worked out separately. The

costs incurred by the PSEB for its different activities is loaded

on the retail sale of electricity and they are not separately

charged. It was further submitted that in any event the

bundling of the cost for various activities has not adversely

affected the consumers.

147. We have reflected upon the submissions of the

learned counsel for the parties on the aforesaid aspect of the

matter. Section 62(1) postulates determination of tariff

separately for each of the following activities:

a) supply of electricity by a generating company to a distribution licensee;

b) transmission of electricity;

c) wheeling of electricity;

d) retail sale of electricity.

148. In order to facilitate the Commission to carry out

the command of the legislation, contained in Sub section (1) of

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Section 62, to determine unbundled tariff, sub-section (2) of

Section 62 empowers the Commission to require a licensee or

a generating company to furnish separate details, as may be

specified in respect of generation, transmission and

distribution of electricity for determination of tariff. Sub-

section (5) of Section 62 also confers power on the Commission

to require a licensee or a generating company to comply with

such procedure as may be specified by it for calculating the

expected revenues from the tariff and charges, which it is

permitted to recover. Enabling provisions of sub-sections (2)

and (5) of Section 62 of the Act of 2003 are meant to arm the

Commission to achieve the purpose of Section 62(1) of the Act

of 2003.

149. Section 86(1) also throws light on the issue. Section

86(1) requires the State Commission to discharge functions

specified thereunder. One of the functions which the

Commission has to discharge as per sub-clause (a) of Sub-

Section (1) of Section 86, relates to the determination of tariff.

Sub-clause (a) of Sub-Section (1) of Section 86 requires the

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Commission to determine the tariff for generation, supply,

transmission and wheeling of electricity, wholesale, bulk or

retail, as the case may be within the State. This Section also

prescribes that the tariff has to be determined separately for

generation, supply, transmission, wheeling and retail sale of

electricity.

150. The PSEB, even after coming into the force of the

Electricity Act of 2003, has remained vertically integrated

utility under the provisions of Section 172 of the Act of 2003,

which reads as under:

“(a) a State Electricity Board constituted under the repealed laws shall be deemed to be the State Transmission Utility and a licensee under the provisions of this Act for a period of one year from the appointed date or such earlier date as the State Government may notify, and shall perform the duties and functions of the State Transmission Utility and a licensee in accordance with the provisions of this Act and rules and Regulations made thereunder:

Provided that the State Government may, by notification, authorise the State Electricity Board to continue to function as the State Transmission Utility or a licensee for such further period beyond the said period of one year as may be mutually decided by the Central Government and the State Government”.

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151. The PSEB by virtue of Section 172(a) is deemed to

be the State Transmission Utility and a licensee for a period of

one year from the appointed date. The State Government by

Notification issued under proviso to Section 172(a) has

authorized the State Electricity Board to continue its function

as the State Transmission Utility and a licensee for the period

2004-05 and 2005-06.

152. The fact that the PSEB has retained the character of

a vertically integrated utility does not mean that the provisions

of Section 62 have to be given a go by. For generation no

licence is required but for distribution, transmission and for

undertaking trading in electricity, a licence is required under

Section 12 of the Act of 2003. The licence is to be obtained for

the said activities from the appropriate Commission under

Section 14 of the Act of 2003. First proviso to Section 14 lays

down that any person engaged in the business of transmission

or supply of electricity under the provisions of the repealed

laws or any Act specified in the Schedule on or before the

appointed date shall be deemed to be a licensee under the Act

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for such period as may be stipulated in the licence, clearance

or approval granted to him under the repealed laws or such

Act specified in the Schedule, and the provisions of the

repealed laws or such Act specified in the Schedule in respect

of such licence shall apply for a period of one year from the

date of commencement of this Act or such earlier period as

may be specified, at the request of the licensee, by the

appropriate Commission and thereafter the provisions of this

Act shall apply to such business. The second and third

proviso make further exceptions and State as under:

14. “Grant of Licence:

…..

Provided further that the Central Transmission Utility or the State Transmission utilitity shall be deemed to be a transmission licensee under this Act:

Provided also that in case an Appropriate Government transmits electricity or distributes electricity or undertakes trading in electricity, whether before or after, the commencement of this Act, such government shall be deemed to be a licensee under this Act, but shall not be required to obtain a licence under this Act:”

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153. Thus, under the aforesaid provisions, the Board is

to be considered as deemed licensee for distribution as well as

transmission of electricity. Clause (38) of Section 2 of the

Electricity Act, 2003 defines a “licence”, which means a licence

granted under Section 14. The Statute does not make any

distinction between a licensee or a deemed licensee.

Therefore, for the purposes of application of Section 62(1) of

the Act of 2003, no distinction can be made between a

distribution licensee or a deemed distribution licensee for

determination of separate tariffs. Similarly, no distinction can

be made between a transmission licensee or a deemed

transmission licensee. Whatever procedure is prescribed for

determination of tariff for transmission and distribution of

electricity by licensees, the same procedure will apply for the

deemed licensees. Since separate tariffs are required to be

determined for transmission and distribution of electricity by

the licensees in the same way separate tariffs are required to

be determined for transmission and distribution of electricity

by deemed licensees, who are vertically integrated.

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154. The whole concept behind unbundling of a utility is

to ensure that the electricity sector performs efficiently. The

cost and expenses for different activities like generation,

transmission, distribution, wheeling and retail sale of

electricity should be known so that it becomes impossible to

hide inefficiency and possible to make corrections, whenever

and wherever needed. This is essential for promoting

excellence in service provided by the utilities. This is also

conducive for the development of electricity industry and

generation of competition. The object and purpose of the Act

of 2003 as reflected in the Preamble thereof will be achieved

only when various provisions of the Act are strictly complied

with. In most of the States, unbundling has taken place but

for no discernible reason it has not taken place in the State of

Punjab. No special circumstances have been pointed out in

the case of State of Punjab which would impel us to think that

the State of Punjab stands on a different footing than other

States in which un-bundling has taken place for achieving the

purpose of the Act of 2003.

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155. The Commission in accordance with the provisions

of Sub Sections (2) and (5) of Section 62 of the Act of 2005

and Section 86(1)(a) thereof, is mandated to determine

separate tariff for generation, supply, transmission,

distribution, wheeling and retail sale of electricity within the

State irrespective of the fact whether the State utility has

remained vertically integrated or has been unbundled.

156. In view of the aforesaid discussion, we direct that

the Commission shall determine the tariff separately for

generation, transmission, distribution, wheeling and retail sale

of electricity. But for the period 2005-06, it may not be

necessary to re-determine the tariff for generation,

transmission and distribution of electricity etc. as the

industrial consumers have not shown any adverse impact of

bundled tariff. Even for the determination of tariff for the year

2006-07, it may not be immediately possible for the

Commission to determine separate tariff for generation,


electricity as the Board will have to work out the details, which

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may take some time. This, however, will not cause prejudice

to the consumers as the Board must provide all the requisite

information to the Commission within five months, so that the

Commission is able to determine separate tariff for generation,


electricity well before the Commission takes up the truing up

exercise close to the end of the year 2006-07. After the truing

up exercise is completed the Commission shall give effect to it

in the determination of tariff for the year 2007-08 as well.

From the year 2007-08, the Commission is directed to

determine separate tariff for generation, transmission,

distribution, wheeling and retail sale of electricity.

J. Re Power Purchase Cost and T & D Losses:

157. The learned counsel for the Board submitted that

the Commission while conducting a truing up exercise for the

years 2003-2004 and 2004-2005 assessed a lower agricultural

pump set consumption (AP Consumption) on the basis of its

own unrealistic norms. The learned counsel further

contended that an amount of Rs. 164.37 crores and Rs.76.44

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crores was illegally disallowed by the Commission on the

assumption that the Board failed to reduce the T&D losses for

the years in question. According to the learned counsel for the

Board, T&D losses rose due to the adoption of lower A.P.

consumption norm. On the other hand, it was submitted by

the learned counsel for the industrial consumers that there

was need to reduce T&D losses of the Board for the tariff year

2005-06.

158. It cannot be disputed that there is need to reduce

T&D losses of the Board to increase the availability of power

and improve performance of the utilities. Operational efficiency

of the utility can be measured by looking at its T&D losses. It

is a most important yardstick for determining the performance

of the utility. High transmission distribution losses have been

responsible for inefficiencies in the system. T & D losses have

a significant impact on the annual revenue requirement of

utility.

T&D losses are worked out by the following formula:

Total energy input in the system– (sum total of metered sales + estimated consumption by the agricultural pump sets)

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159. The whole difficulty arises because meters have not

been installed for the individual AP Consumers. Even if there

was proper metering on the feeders, supplying power to AP

Consumers consumption by the AP Consumers could have

been verified on actual basis. But, as the actual figures are

not available, T & D losses, therefore, are estimated by the

Board and the Commission.

160. In the ARR for the year 2002-2003, the Board

projected the following figures of T & D losses:

Year T &D Losses as per ARR 2002-03 1999-00 30.80% 2000-01 26.51% 2001-02 25.50%

2002-03 24.50%

161. Subsequently, the Board in its presentation on July

23, 2002, before the Commission, estimated T & D losses as

under:

Year T&D Losses as per Presentation 2001-02 26.25% 2002-03 24.50% 2003-04 23.00% 2004-05 21.50% 2005-06 20.75% 2006-07 20.00%

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162. The Commission determined loss level for the year

2001-2002 at 27.52% against 25.5% estimated by the PSEB.

For the year 2002-2003, the Commission reduced the target

by 2%, thus, scaling the T & D losses from 27.52%. It is

significant to note that the Government of Punjab has signed

memorandum of understanding with the Government of India

for undertaking reforms in the power sector in the state of

Punjab. In the memorandum of understanding, the State

Government had agreed to bring down the T & D losses to

18% by the year 2003. However, the Commission fixed the T

& D loss level at 25.52% for the year 2002-2003.

163. The PSEB in the ARR filings of the year 2003-04

reflected the T & D losses of 26.25% for the year 2002-2003.

The Board worked out the AP Consumption at 6150 MUs on

assumed basis. The Commission, however, determined the

consumption at 5818 MUs. On this basis, the T & D losses

against the actual energy availability came to be 25.61%

against the target of 25.52% fixed by the Commission. It

appears that the T & D losses and AP Consumption were

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reworked in the tariff order pertaining to the year 2004-2005.

As per the re-determination, T & D losses work out to 24.54%,

against the target of 25.52%. For this achievement, the Board

was given incentive.

164. It is pointed out by the Commission that in the ARR

filed for the year 2003-2004, the Board submitted that the T &

D losses would be reduced during the year 2003-2004 to the

level of 26.0%. Subsequently, the Board represented before

the Commission on May 7, 2003, that the T & D losses for the

year 2003-2004 will be restricted at 24%. The Commission

fixed the T & D losses target at 24.5%, instead of 24%, as

represented by the Board. The target of 24.50% reflects a

reduction of 1.02% over the target fixed for the year

2002-2003.

165. For the years 2004-05 and 2005-06, the

Commission worked out the T & D losses and the estimated

consumption by agricultural pump sets, as set out below:

“Losses for the year 2004-05:

In its ARR filings for the year 2004-2005, the Board has stated that the revised estimates for losses for the year 2003-2004 are 25.35%. This figure has been computed

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with the agriculture consumption level being estimated by the Board at 6243 MUS. With regard to the norm to be adopted for determination of the aggregate consumption by the agriculture pump sets, the Commission has given its decision in para 3.3 that it will be 1650 kwh/kw/year for 2003-04 as was decided by the Commission in its tariff order for that year. Adopting this norm, the aggregate agriculture consumption comes to 5744 MUs and the T & D losses for the year 2003-04 work out to be 27% against the target fixed by the Commission at 24.50%. Thus, instead of showing an improvement, there has been a sharp decline in the performance of the Board. It has been stated by the Board that the losses during the year 2003-04 are higher because of a (a) higher expected supply to consumers and lower power cuts; (b) greater supply to the low end consumers; (c) a large number of inefficient submersible motors have been installed by the consumers and unauthorized load of the motors has not been regularized; and (d) the desired frequency in the metered sale could not be achieved owing to non replacement of slow and sluggish meters with the static meters on account of limited availability of static metes. The reasons given by the Board for its failure to achieve the target during the last year do not carry any conviction and hence the Commission is unable to accept these. If any judgment was to be passed, it could be said that the Board has shown no seriousness in pursuing this vital matter. In these circumstances and as was indicated in its last tariff order, the Commission has no option but to penalize the Board for this failure. The Board in its ARR filings for the year 2004-05 has stated that during the year 2004-05, the losses would be reduced to the level of 24.0% on the assumption that consumption by agriculture pump sets will be 6472 MUs. The Commission has separately decided in para 7.2 that the norm for determining the total agriculture consumption during the year 2004-05 would be 1700 kwh/kw/year, which gives the figure of 6213 MUs as the aggregate

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agriculture consumption during the year. Further, the Commission has decided to fix the target for T & D losses at 23.25% for the next year 2004-05 ( a reduction of 1.25% over the loss level fixed for the last year 2003-04). The Commission is firmly of the view that if the Board was to acquire even a reasonable determination to show results, this target is eminently achievable. The Commission reiterates its intention not to compromise in this matter because this is the least which the Board can do to show respect for the unanimous view of all the consumers and the State Government and demonstrate its own commitment to its often declared resolve to achieve higher operational efficiencies. All the legitimate revenue requirements of the Board, including for investment, are being fully met through the tariff orders of the Commission and the Government of Punjab has repeatedly stated its willingness to lend full support to the anti theft drive of the Board. The Commission would also like to state here that it would continue to set this modest target of 1.25% for loss reduction in each of the next four years starting with 2004-05.” “3.4 POWER PURCHASE To meet the energy demand, the Board, in its ARR for the year 2004-05 projected power purchase at 10728 MU net. The Commission in its Tariff Order for the year 2004-05 approved power purchase for the year 2004-05 at 11372 MU net. In the ARR for the year 2005-06, the Board has given revised estimates of power purchase for the year 2004-05 at 12457 MU net. The Board in its presentation dated April 11, 2005 has given R.R.E. for power purchase at 10915 MU net. These being the latest estimates, the Commission accepts the power purchase at 10915 MU net for the year 2004-05.

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3.5 TRANSMISSION & DISTRIBUTION LOSSES (T & D LOSSES) In its ARR for the year 2004-05, the Board has projected T & D losses at 24% for the year 2004-05 on the assumption that AP consumption will be 6472 MU. The Commission in its Tariff Order for the year 2004-05 fixed the target for T & D losses at 23.25% for the year 2004-05 with AP Consumption at 6213 MU arrived at with norm for AP consumption at 1700/kwh/kw/year. In the ARR filing for the year 2005-06, the Board has given revised estimates for T & D losses during 2004-05 as 24.50% with revised estimates of AP consumption at 6853 MU arrived at with AP consumption norm of 1814 kwh/kw/year on the connected load and factoring the consumption of temporary tubewell connections, lift irrigation tubewells, tubewells in Kandi area and PAU tubewell connections. With actual sales including AP consumption at 6563 MU as now approved and actual availability (generation + purchase) as per R.R.E. given by the Board in its presentation dated April 11, 2005, the actual T & D losses work out to 24.14%. With sales and energy availability now approved by the Commission, the T & D losses will work out to 24.19% against the target of 23.25% fixed by the Commission as shown in Table 3.8 under Energy Balance. The Commission in its tariff order for the year 2004-05 had deliberated the issue of T & D losses in detail before fixing T & D loss level for the year 2004-05. The Commission sees no reason for review of its decision. The Commission, therefore, retains target T & D loss level at 23.25% for the year 2004-2005. The Commission decides that financial burden due to the consequential additional power purchase on this account may not be passed on to the consumers but borne by the Board.

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3.6 ENERGY BALANCE The details of energy requirement and availability in the ARR for the year 2004-05, approved by the Commission in the Tariff Order for the year 2004-05, revised estimates in the ARR for the year 2005-06, later revised by the Board in its presentation and subsequent fax and now approved by the Commission are given in Table 3.8 below. Energy balance for working out actual T & D loss with sales and availability now approved by the Commission is also shown in column 8 of Table 3.8.

EXTRACT OF TABLE AT PAGE 60 OF Tariff order 2005-06

The total energy requirement now approved by the Commission is 30465 MU (net) whereas total energy availability now approved is 30833 MU (net). The difference of 368 MU (net) between energy requirement and energy availability is due to the under-achievement of the T & D loss target approved by the Commission as discussed in para 3.5 and depicted in columns 7 & 8 of Table 3.8. The higher T & D loss level than the T & D loss level approved by the Commission has, thus, resulted in increased power purchase to the extent of 368 (7279-6911) MUs net.”

166. Thus, it is seen that the Commission has worked

out the T & D losses, on the basis of norms. The norms fixed

by the Commission are neither unreasonable nor arbitrary. It

appears that the Board was not able to reach the targets set

by the Commission, except once. A comparison of the targets

set by the Board in its presentation dated July 23, 2002 and

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its actual performance shows that T&D losses were hardly

reduced by the Board.

167. It may be pointed out that a study group was

appointed by the State Government for steering power reforms.

It was pointed out in the report that there was need for a

realistic measurement of the base level T&D losses of the

system. It was also pointed out that in the physical terms,

PSEB loses about 7,500 million units in T&D losses which

implies a revenue loss of about Rs. 2,400 crores per annum.

That apart it was brought out in the report that in several

countries in a very short time T&D losses were considerably

reduced. For example, a company in Argentina reduced the

losses from 25.6% to 8.1%; while a company in Peru reduced

the losses from 20% to 10.1%. Another example given by the

Study Group is of a company in Chile, which reduced T&D

losses from 19.8% to 6%. The expert group was of the opinion

that target of 12.5% for Punjab was well worth perusing.

168. It is extremely important for the electricity sector to

reduce the T & D losses. We find no reason to interfere with

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the determination of the Commission with regard to the T & D

losses. In this view of the matter, we do not find any merit in

the submissions of the learned counsel for the Board in this

respect and they are accordingly rejected.

K. Coal Transit Loss: 169. The Board is aggrieved by the disallowance of Rs.

7.37 Crores on account of alleged coal transit loss for its

thermal generating stations for the year 2004-05. It is also

aggrieved by the capping of the coal transit loss on 0.8 percent

in the non-pit head station for the financial year 2005-06.

170. The Commission has pointed out that during the

Tariff year 2004-05 the PSEB had claimed that the usual

transit loss during 2003-04 was 7.31 percent, 1.62 percent

and 2.72 percent for GNDTP, GGSTP and GHTP respectively

against approved transit loss of three percent for all the three

thermal power generation stations. As is clear from the order

of the Commission the transit loss in respect of the aforesaid

three plants during 2003-04 was verified and it was found to

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be 2.99 percent, 1.38 percent and 2.72 percent. The

Commission also pointed out that CERC norms specify coal

transit loss for non-pit head generation stations at a level of

0.8 percent.

171. In the circumstances, the Commission approved

transit loss of two percent for all the three stations for the year

2004-05.

172. We do not find any error in the view of the

Commission. Losses must be brought down by the utilities by

adopting appropriate and prudent measures. Losses reflect

inefficiencies and must be ultimately eliminated. Therefore,

we do not find any reason to disagree with the view of the

Commission. Accordingly, the plea is rejected.

L. Conclusion

173. In the result:-

(i) Appeal Nos. 4,13,14,23, 25, 26, 35 & 36 of 2005 of the Industrial consumers are allowed to the extent indicated above;

(ii) The directions contained in this judgment shall be

carried out by all concerned including the State of Punjab, the Commission and the Board;

of 201

Appeal Nos. 4,13,14,23,25,26,35,36,54 and 55

(iii) The relief granted herein shall be applicable to all the

consumers and shall not be confined to the appellants (industrial consumers) before us;

(iv) Appeal Nos. 54 and 55 of 2005 preferred by the Board

are hereby dismissed as we do not find any merit in them; and

(v) The parties shall bear their respective costs.

Before parting with the matter, we must place on record

our appreciation for the valueable assistance rendered by the

learned counsel Mr. S.N. Mookherjee, Mr.M.G.

Ramachandran, Mr. Sanjay Sen, Mr. P.S. Bhullar, Mr. Arun

Nehra and other learned counsel.

( Justice Anil Dev Singh) Chairperson

26.05.2006

( Justice E. Padmanabhan) Judicial Member

( A.A. Khan) Technical Member

++ corrected as per the Order dated 25th July 2006

of 201

before the appellate tribunal for electricity (appellate...

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